What is the outlook for dividends and dividend strategies? What is the outlook for dividends and dividend strategies? https://stage-fii.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png https://stage-fii.federatedinvestors.com/daf\images\insights\article\jar-coins-small.jpg April 2 2020 April 2 2020

What is the outlook for dividends and dividend strategies?

Perspectives on the impact the pandemic is having on companies.
Published April 2 2020
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Q: With many companies focused on keeping their operations going, are you concerned about the potential for widespread dividend reductions or suspensions?

In evaluating dividend risk, we analyze operations, cash flows, balance sheets, management inclination and political/regulatory risk. Bearing those factors in mind, we believe our current holdings provide clients with the best opportunity to earn an attractive dividend stream in spite of the current economic headwinds and dividend cuts by companies outside our portfolios. With central banks announcing monetary and fiscal measures to stem the economic impact of Covid-19, “political dividend risk” has shot to the forefront of our near-term dividend sustainability analysis.

Policymakers, especially in Europe, are becoming more involved in the capital allocation conversation. The European Central Bank already has recommended that eurozone banks defer dividends and buybacks in 2020. Other financial regulators are starting to make similar overtures. And eurozone companies outside the banking sector also are feeling pressure to preserve capital and offer greater financial support to their workers, customers, supply chains and communities. As a result, some European companies that don’t need to alter their distributions may conclude that it would be politically ill-advised to maintain their payouts. While we believe many high-quality eurozone companies will continue to pay their dividends uninterrupted through this period, 2020 nevertheless may mark the advent of the “patriotic dividend cut” for some issuers.

Alternatively—and we’ve already seen several cases of this—companies may elect to defer their typical dividend decisions until they have greater clarity on the current situation. Dividends also could be delayed for more practical reasons. For example, due to social-distancing guidelines, several large eurozone companies already have postponed annual meetings at which declared dividends typically are ratified. Rather than being suspended, these dividends could merely arrive several months late. Or, in theory, after having more time to evaluate the situation, some companies’ boards could still elect to reduce or suspend the dividend. As of today there are no signs such actions will be widespread for well-situated dividend payers.

This is what’s happening in parts of Europe. In the United States, and in several non-eurozone countries, we have yet to see the same heightened level of political scrutiny being placed on dividend payers. Across all of our holdings, domestic and international, political and regulatory risks are inescapable when government intervention is necessary. We’re keeping a close eye on this situation and working to quantify these risks and minimize the potential impact to our clients’ dividend streams where appropriate.

In sum, it is reasonable to assume that we could experience further dividend headwinds this year. Our higher priority now is to manage risks that can affect client capital and position the portfolio to seek a high and rising income stream coming out of this exceptional period.

Q: Do you expect a prolonged low-rate environment? What are the implications for dividend investing?

We expect interest rates to remain low for an extended period—the 10-year Treasury yield is below 1%, sovereign rates are near 0% or negative through much of Europe, investment-grade corporate bond yields are low and even after its bear-market sell-off, the S&P 500 is yielding only around 2.4%. So investors, globally, are facing a scarcity of income. But there’s been no change in the need for income. Indeed, the opposite may be true in a period of economic slowdown. In that environment, a portfolio built from high-quality companies with abundant free cash flow should prove attractive to income-seeking investors.

Q: With the consensus concurring the economy is almost certainly in recession, how have dividend-focused strategies performed in past recessionary periods?

Historically, dividend strategies have tended to be defensive during market downturns associated with recessions and periods of market volatility. This isn’t surprising given that the investment focus of these strategies is on strong, stable companies with long, consecutive records of dividend payments.

Tags Coronavirus . Equity . International/Global . Interest Rates . Volatility .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

There are no guarantees that dividend-paying stocks will continue to pay dividends. In addition, dividend-paying stocks may not experience the same capital appreciation potential as non-dividend-paying stocks.

There is no guarantee that dividend income streams will continue to grow in the future or will exceed the income of bonds and other fixed-income investments. In addition, stocks may experience greater volatility than bonds.

 

Federated Equity Management Company of Pennsylvania

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