Dividend Cuts Pose New Challenge to Advisers Seeking Income

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.

Q&A with the CEO & Co-Portfolio Manager of Reaves Asset Management, Jay Rhame

Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently-owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

1 Wall Street Journal, April 28, 2020, “Companies Are Suspending Dividends at Fastest Pace in Years”

2 Reaves’ Long Term Value Strategy (Reaves LTV Strategy) seeks a high risk-adjusted total return. The strategy tends to be invested in relatively larger companies with strong balance sheets, good cash flow and a history of dividend growth. Core positions are accumulated in financially strong, high-quality companies and generally have the following characteristics: strong management, above industry-average growth rates, large/mid-market capitalization and low price-earnings multiples.

Beginning December 2019, Reaves LTV Strategy is represented by the LTV SMA Wrap Composite. This composite contains those LTV discretionary portfolios with wrap (bundled) fees. Wrap accounts are charged a bundled fee which includes the wrap sponsor fee, as well as, Reaves’ investment advisory fee. Due to compliance requirements, the net-of-fees calculation is computed based on the highest annual fee assigned by any wrap sponsor who utilizes this portfolio in an investment wrap program (300 basis points from 1/1/03 through 12/31/16 and, effective 1/1/2017, 250 basis points). The LTV SMA Wrap Composite performance consists of money-weighted, time-weighted returns and it includes the reinvestment of all dividends and other earnings. The inception date of the composite is December 2002; however, the composite was created in January 2013. This composite has been managed in a similar manner to the LTV ERISA Composite which ended in December of 2019. The LTV SMA Wrap Composite does not represent all of Reaves’ assets under management.

Past performance is no guarantee of future results. All investments involve risk, including loss of principal. All data is presented in U.S. dollars.

Important Tax Information: Reaves Asset Management and its employees are not in the business of providing tax or legal advice to taxpayers. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.

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