Royal Dutch Shell became the latest FTSE 100 company to cut its dividend amid the coronavirus pandemic on Thursday, dealing another blow to income investors already impacted by a dwindling pool of investment options.
Anglo-Dutch Shell RDSA, +8.30% shocked investors when it slashed its quarterly payout by 66%—from 47 cents to 16 cents, starting in the first quarter of this year, following the collapse in global oil demand.
“It is not surprising that in this period of lockdown companies are looking to preserve capital, but investors need to remember not to rely solely on one sector or region for their income as it can easily be impacted by events such as these,” said Helen Bradshaw at fund management group Quilter Investors.
“While the U.K. remains important to investors from an income perspective with many big businesses keeping their dividend in place, they must remember that payouts here were already highly concentrated to just a handful of companies, so volatility in the markets will always have an impact,” she adds.
Russ Mould, investment director at AJ Bell, said that investors risk putting money into the markets in order to stand a chance of achieving a better return than cash in the bank. While rates on cash savings accounts have been drifting down for a while, investment dividends were widely considered to be much more reliable.
“Sadly that is no longer the case given how more than 300 companies on the U.K. stock market have this year said they won’t be paying dividends for the time being or paying a much lower level than before. This figure includes 41 companies in the FTSE 100,” he said.
ETF provider GraniteShares has reviewed dividend announcements from U.K. listed companies for the period March 19 to April 20, and found that around 92% involved canceling or suspending payments.
In total there were around 176 dividend announcements during this period, with 162 companies canceling or suspending, and just 14 making payments, although some of these were reduced. Among the 14 companies that made dividend payments were Tesco TSCO, +0.79%, Anglo Pacific APF, -1.22% and Hilton Foods HFG, +0.33%.
Investors, however, can still find sustainable income elsewhere, Bradshaw argues. Here are three sectors that she tips as the new “dividend heroes.”
Asian equities: “While Asia is not a place traditionally associated with a strong dividend culture, many of the corporate governance reforms we have seen in this region have encouraged one to begin to flourish. As such, we expect less dividend cuts in this area as the payout ratios are lower and many of the businesses have taken on low amounts of leverage. This should provide investors with a feeling of stability in knowing what yield to expect to receive.” Fund pick: Schroders Asian Income fund
Infrastructure: “Infrastructure investments, particularly those focused on availability based assets, tend to be less correlated to the wider stock market, meaning in times of a downturn they should offer an element of protection. Many of the investment trusts offering exposure to this asset class have seen premiums contract year to date and with income yields between 4-5% and with healthy levels of dividend cover, these are attractive investments for people looking for a sustainable income stream.” Fund pick: International Public PARTNERSHIPS INPP, +0.74%
Real Estate: “Despite the U.K. shutdown calling into question the rental income streams for most companies in the sector and many have had to suspend dividends, there are some exceptions out there that investors could look to for income. There are some specialist real-estate investment trusts which have more predictable business models as well as the benefit of government backed streams of income through tenants such as the NHS, meaning investors can feel confident that payments will still be made during this difficult time. As such these could be good diversifiers to income streams.” Fund pick: Assura AGR, +2.53%