Just how secure are dividends?

Dividends offered by the UK’s biggest companies are reaching new highs compared to their earnings. Dividend payout ratio for the FTSE 100 has just passed 70%, meaning over the last year, dividends have been worth more than 70% of those companies’ earnings. The fact that many of these companies are troubled shows that companies are under pressure to keep dividends up, even when revenues are trailing off. So just how secure are dividends?

2015 was challenging, with dividend cuts from food retailers (Tesco, Sainsbury’s and Morrisons), miners (Anglo American, Glencore) as well as Standard Chartered, Centrica, Rolls Royce and Amec Foster Wheeler. And 2016 is going the same way, with the world’s two largest listed miners – Rio Tinto and BHP Billiton – also slashing dividends. In Rio’s case, it’s had to eat its words – it was so confident in its ability to pay a progressive dividend that it continued to repurchase its own shares in 2015. And in March, Barclays announced it would cut its dividend by 50% for two years to preserve capital.

The era of ultra-low interest rates provided a strong environment for high yielding shares and as the tide has risen, so a general ‘hunt for yield’ has driven assets higher. Warren Buffet famously said, “Only when the tide goes out do you discover who’s been swimming naked”. Now the interest rate tide is ebbing out, we’ll be able to see who’s been swimming naked in the dividend sea.

Following the recent meeting in Doha the prospect of an immediate recovery in the oil price seems unlikely. It’s probable we will remain in a ‘lower for longer’ environment, meaning an immediate recovery in dividend cover – at least in the energy sector – is unlikely.

Against this underlying backdrop, we feel that investors should be wary of investing in stocks where a dividend cut is likely. Going forward, vigilance is the watchword when considering just how secure are dividends.

Your capital is at risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

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