As businesses have been hit by the coronavirus pandemic, some have decided to cut dividends and regulators are adding pressure for others to follow suit. This may leave a hole in your income if you rely on dividends, explains Frances Boiling, a Chartered Financial Planner at Pembroke Financial Services.
According to reports from The Times, investors have suffered a dividend cut of at least £600 million as some of the UK’s biggest businesses aim to conserve cash during the coronavirus pandemic. A wide range of business sectors has been impacted by the virus and resulting lockdown, leading to profits tumbling. As a result, firms have taken steps to hold cash as a buffer and, in some cases, regulators have stepped in. The UK banking regulator, for example, wants banks to suspend dividends temporarily. Some businesses are also using the government’s scheme to furlough staff, therefore taking money off the taxpayer, leading to questions around whether these firms should continue to make payouts to shareholders.
Why does this affect investors?
Frances says: “If you’re investing in growth stocks with a long-term plan, the recent market volatility isn’t likely to have a significant impact on your goals overall. However, it’s a different story if you rely on dividends to top-up your income.”
A dividend is the distribution of a portion of the company’s earnings paid to shareholders. Dividends are managed by the company’s board of directors and must be approved by shareholders through their voting rights. Dividends are typically paid in cash, but can also be issued as shares, and may be issued at regular intervals.
As a result, dividend-paying companies may be used as part of an income investment portfolio. These typically involve investing in well-established companies that no longer need to reinvest the majority of profits back into the business to reach goals. As a result, high growth businesses typically don’t pay out dividends.
Frances comments: “For the most part, once a company has established dividends, investors expect this to continue, but that doesn’t mean they will. As even established firms face uncertainty in light of the pandemic and more are choosing to either freeze or suspend dividends in the short term.
“Whilst historically dividends have tended to be less volatile than the stock market itself, this doesn’t mean they are a ‘safe’ investment. Investing for income, including dividend-paying companies, still comes with risks that need to be considered.”
So, if dividends make up a portion of your income, what can you do?
1. Reduce outgoings
If your income has been affected, the first thing to do is understand what it means for your finances in the short term. If there is a shortfall in covering essential outgoings, there are currently government-backed schemes in place to support households, including mortgage holidays. Where possible, it may be necessary to reduce outgoings temporarily to match the reduction in income.
2. Use your emergency fund
Everyone should have a cash emergency fund they can fall back on should their income drop. Ideally, this should be easily accessible and have enough to pay for three to six months of outgoings. Often clients can feel reluctant to access this money they’ve put away for a rainy day, but it’s times like these that you’ve been saving for.
3. Create an income from other assets
If your income from dividend-paying stocks has fallen, you could build an income stream from other assets that you hold. What’s possible and whether or not it’s the right decision for you will depend on a variety of factors. If this is something you’d like to discuss, please get in touch with us.
4. Keep your investment plans in mind
If dividends have been reduced or halted altogether, you may be tempted to dump the stocks and look at alternatives. However, keep the bigger picture in mind.
Given the current situation, it’s likely many dividend-paying companies are in a similar position for the time being. A reduction in dividends can be a prudent move and ensure sustainability, therefore protecting your dividend income over the long term. If you’re worried about how secure a firm is, research why the changes to dividends have been made. A statement is often made available on the firm’s website. This may be able to provide you with some reassurance that the changes are temporary.
5. Speak to us
Frances adds: “We’re here to help ease concerns you have about your financial situation and what it means for your plans. This includes a reduction in dividend income. Whether you want to understand what it means in the short term or are considering making investment changes due to this, please get in touch with us.”
For investment advice you can trust call 01273 774855 or email us by clicking here.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.