Advisers serving clients who rely on investment income have a tough task ahead. Even before the pandemic, a historically low rate environment made it difficult to find stable income. A rash of companies canceling or suspending dividends has intensified the challenge.
We believe advisers and investors can still find stable dividend payers. But the environment has winnowed the field to the most recession-resistant industries
How Bad is the Dividend Picture?
Through late April of this year, 83 U.S. companies and REITs (Real Estate Investment Trusts) had suspended or canceled dividends, the Wall Street Journal reported. For perspective, that is more dividend suspensions and cancelations than the previous 10 years combined, and is the highest total since at least 2001, according to data sourced in the article1.
Another 142 companies have reduced payouts to shareholders this year, the Wall Street Journal reports, which is on pace to be the most since 2009.
The growing roster of companies canceling or reducing dividends highlights the extraordinary economic environment in which companies operate. Typically, companies are loath to cut dividends, due to the negative signal it sends to the market. But as entire industries have been shut down due to the pandemic, many companies have had no choice but to cancel and preserve cash.
Some Dividend Outlooks Still Appear Stable
For advisers serving yield-hungry investors, the search is still not hopeless. But we believe the field of reliable dividend payers has narrowed to companies operating in the most economically resilient industries.
As we have mentioned in a previous blog, at Reaves, we limit our investment focus to companies who provide the foundational infrastructure of a modern economy. These businesses provide essential services such as electricity, gas, or broadband connection, and are the absolute last items a household or business can cut from their budgets.
For these companies, dividend payments have remained stable through the downturn. As the most recent earnings reporting season closes, none of the companies owned in our Long Term Value Strategy, for example, reduced, canceled or suspended dividends.
Given the necessity of these companies’ services, we expect their outlook for dividends to remain positive. In fact, six of the holdings in the LTV Strategy2, held on 3/31/20, have rewarded shareholders with dividend increases averaging 8.8% since the beginning of February. We believe that most of the remaining companies in the portfolio will declare a dividend hike before the end of 2020. If our outlook is correct, we think there is a good chance that share prices will continue to rebound.