Has dividend income failed you?
2020 has been a lousy year for dividends. 45% of UK companies have already scrapped dividends, and further cuts are expected.
Even Shell has cut its dividend by 2/3rds – the first time it has cut its dividend since World War II.
It’s not just the UK that has seen dividend cuts; Janus Henderson advises that a quarter of companies in its Global Dividend Index have cut or deferred at least one dividend.
2020 has been a bad year for deposit interest too.
We thought that interest rates on money deposited with the bank had fallen as far as it could before coronavirus, only to find that interest rates could fall further.
Clients have received letter after letter from the banks, adding another zero after the decimal point!
It isn’t easy to find fixed term accounts paying more than 1% at the moment. How long will it be before banks start charging us to hold our cash (particularly now that cash comes with a real health warning)?
Distributions from fixed interest funds have been falling for years, as companies and governments have been able to borrow money at increasingly low rates.
And 2020 hasn’t been good for rental income.
While property fund managers are reporting that most of their tenants are continuing to pay their rent, many are asking for deferrals or negotiating reductions.
So, 2020 has been a pretty tough year for anyone who lives off the “natural” dividend, interest and rental income from their investments.
This “natural” income strategy has been under pressure for many years now, but has remained prevalent; despite warnings from people like me, the strategy has worked quite well for many years, and the risks in the strategy have only appeared to be hypothetical.
Maybe this is just a blip?
The collapse in dividends has happened suddenly, in extraordinary circumstances. Could it just be a blip and could dividends and other types of income return to previous levels soon?
Recent research by AJ Bell illustrates the riskiness of relying on UK dividends – they estimate that just ten companies will pay out over 50% of all dividends in the UK, so the risk of a further reduction in dividend income must be reasonably high.
The severe economic contraction caused by coronavirus has also brought a moral dimension to dividends – it’s questionable for a company to receive government support, or furlough employees on the one hand, and to pay a dividend to its shareholders on the other hand.
It seems unlikely that dividends will be returning to their 2019 levels any time soon.
It’s also worth remembering that there is an ethical dimension to a reliance on dividends from UK companies.
Any portfolio of large, UK dividend-paying companies is likely to include substantial exposure to companies involved in tobacco, fossil fuel, mining and alcohol sales.
Interest rates have been falling for years, and it does seem unlikely that this trend is about to reverse. It doesn’t look like landlords will be able to increase the rents they are charging their tenants for some years – particularly in the office and retail sectors.
We don’t think that this is a short-term blip. If you are to fund your retirement successfully, you are going to need to adopt a different approach.
What’s the answer?
A diversified portfolio of conventional investments has been proven, time and again, to be able to support regular withdrawals over the longer term, without exposing the investor to any significant risk that their income will need to reduce from year to year.
Sometimes I wish I could come up with a new solution to write about!
The evidence is there for all to see. Data from the last one hundred years or so shows what level of monthly or annual withdrawals can be sustainably supported by a diversified investment portfolio, taking account of previous extraordinary investment events, like World Wars, Great Depressions and Hyperinflation.
The power of modern technology allows us to combine this information with personalized life expectancy data to work out what level of withdrawal can be sustained by your portfolio, and what risks you will be taking if you exceed your sustainable withdrawal rate.
If you would like to discuss how much you can sustainably withdraw from your portfolio, please get in touch.