Are dividends back after last year’s market meltdown?

Shareholder payouts were slashed in 2020, but are projected to rise by 5% in 2021

One in eight companies cancelled their payouts altogether in 2020, while one in five made a cut, according to the Janus Henderson Global Dividend Index. Photo: Getty Images

Dividends are back. Shareholder payouts were slashed or suspended at the start of the pandemic, but are being restored at impressive speed.

This is yet more good news for investors, who are already celebrating US stock markets hitting all-time highs, with the S&P 500 smashing through 4,000 for the first time in April.

The great global dividend revival isn’t as spectacular as that, as total payouts remain well below pre-pandemic levels, but the recovery has been faster than many expected and the direction of travel is clear.

Given the long-term benefits of dividends to your portfolio, it is worth paying attention.

Dividends are the regular payments companies make to reward investors for holding their stock. They are not guaranteed, but most companies look to increase theirs every year, which gives investors a rising income over time.

Not last year, though. Dividends took a sound beating at the start of the first lockdown, as companies cut their dividends to protect their balance sheets.

Globally, dividends fell by 12.2 per cent in 2020 to $1.26 trillion, with cuts and cancellations totalling $220 billion between April and December.

One in eight companies cancelled their payouts altogether, while one in five made a cut, according to the Janus Henderson Global Dividend Index.

Investors with large sums invested in banks will have suffered the most, as they accounted for a third of global dividend cuts.

Oil producers and mining companies also cut back hard. As did companies in the consumer discretionary sector, such as cars, clothing, household goods, travel and leisure. Classic defensive sectors held firm, including food retail, pharmaceuticals and personal products.

Jane Shoemake, client portfolio manager at global active asset manager Janus Henderson, says some countries were hit harder than others, underlining the importance of investors having globally balanced portfolios.

The UK and Europe accounted for more than half the total reduction in global payouts, mainly because regulators forced banks to cut dividends.

In contrast, dividends rose by 2.6 per cent in North America. US companies were able to conserve cash and protect dividends by suspending or reducing share buybacks, while regulators were more lenient with banks. China, Hong Kong, Switzerland and Canada also did well.

To build long-term wealth, you should automatically reinvest dividends back into your portfolio

Dividends may continue to slide in the first quarter of this year, but in Janus Henderson’s best case scenario, they could rise by 5 per cent across 2021.

Dividends are an attractive way of generating income in retirement, but they can also help build wealth while still working.

Tim Bennett, head of education at Killik & Co, says they provide a “short-term cash return” on your investment, but do not spend them in the early years. “To build long-term wealth, you should automatically reinvest them back into your portfolio.”

The benefits are striking. At the time of writing, the FTSE 100 trades at 6,959. Incredibly, that is only a fraction above the level it hit on December 31, 1999, more than 21 years ago, when it ended the millennium at 6,930.

The FTSE 100 has gone nowhere, yet investors have still made money. If you had invested at the very top of the index on the eve of the millennium and reinvested all your dividends, you will have made a total return of 116 per cent, according to figures from AJ Bell.

FTSE 100 companies have declared £24.8bn of dividends so far this year, with cuts of just £2.8bn, Laith Khalaf, a financial analyst at AJ Bell, says.

“Oil majors BP and Royal Dutch Shell, steel and mining company Evraz and asset manager Standard Life Aberdeen are the only ones to cut this year, but all four paid something.”

He predicts the FTSE 100 will yield 3.8 per cent this year, and suggests that dividend investors consider investing in mutual fund Man GLG UK Income.

“This targets unfashionable companies that the market has undervalued, but are paying a sustainable dividend to investors. It currently yields 4.3 per cent.”

In the US, the S&P 500 as a whole currently yields 1.45 per cent, down from a peak of 2.31 per cent last year. This is below the long-term average of 1.87 per cent.

But this does not mean US companies have started cutting dividends. Instead, it is a reflection of how fast the index has grown.

Yields are calculated by dividing the dividend per share by the share price. So, if a company pays $5 per share and its stock trades at $100, the yield is 5 per cent. If its share price doubles to $200, the yield halves to 2.5 per cent (unless the dividend is increased).

US companies are in the middle of the reporting season and so far the signs have been promising for investors, with Microsoft returning $10bn in dividends and share buybacks, up 1 per cent from a year ago. Apple has announced a 7 per cent quarterly dividend increase.

Not every top company pays dividends. So-called growth sectors, including the technology giants, focus on re-investing in the business rather than making distributions to shareholders.

Google-owner Alphabet pays no dividends, but few investors will be complaining given that its share price climbed 87 per cent in the past year. Nor does online retail giant Amazon, which is up 47 per cent in a year. Apple yields just 0.61 per cent and Microsoft 0.86 per cent.

Growth stocks like tech firms have ruled the roost lately, but the balance may now start swinging back in favour of dividend stocks.

Fawad Razaqzada, market analyst at ThinkMarkets, says tech stocks will struggle to meet investor expectations.

As yields recover, dividend-paying stocks may look more attractive

“We could even see a reversal as investors worry about rising borrowing costs, tougher regulations, higher taxes and lower earnings potential.”

Darius McDermott, managing director of FundCalibre, says as shareholder payouts are restored or increased, dividend-paying stocks may look more attractive. He suggests spreading risk with investment funds targeting different regions of the world.

For US exposure, he tips JPM US Equity Income, which yields 1.98 per cent and has delivered a total return of 90 per cent over the past five years. Top holdings include Comcast, BlackRock, Bank of America, Johnson & Johnson and Bristol Myers Squibb.

M&G North American Dividend yields just 1 per cent, but has delivered a higher total return of 132 per cent over five years.

While many European companies cut their dividends last year, they began from a higher starting point than the US and still yield more.

Mr McDermott suggests BlackRock Continental European Income, which yields 2.37 per cent and returned 66 per cent in total over the past five years. LF Montanaro European Income yields 2.60 per cent and returned 89 per cent.

Asia is becoming an increasingly popular destination for dividend stocks as more companies adopt a culture of making shareholder payouts, Mr McDermott says.

He tips Jupiter Asian Income, which yields 3 per cent and returned 84 per cent over five years, from companies across a host of markets in the Asia-Pacific region, including Australia, Taiwan, Singapore, China, South Korea and India. Guinness Asian Equity Income has posted similar returns.

Alternatively, ETF investors may prefer the SPDR S&P Dividend Aristocrats fund range, which targets companies with a track record of regularly increasing dividend payouts.

The SPDR S&P US Dividend Aristocrats UCITS ETF version yields 2.99 per cent, SPDR S&P UK Dividend Aristocrats 2.90 per cent, and SPDR S&P Euro Dividend Aristocrats 3.41 per cent.

SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF, which covers Asia Pacific, yields 3.57 per cent.

In today’s low interest rate world, dividends are king for those seeking income.