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Coronavirus leaves pension savers facing painful ‘dividend shock’

Posted by Adrian Lowcock in Press releases category on 25 Mar 20


Pension savers are facing a painful dividend shock as a result of the Government’s decision to forcibly close millions of businesses, according to Adrian Lowcock, head of personal investing at Willis Owen.

Investors have been left reeling by the Coronavirus outbreak, which has wiped billions off global stock markets in the past six weeks alone. 

However, Lowcock believes investors are facing a potential double blow, with the government-forced closure of businesses likely resulting in a raft of firms having to cut their dividends. 

Like in many countries around the world, the UK government this week ordered all businesses not selling essentials, such as food and medicines, to close their doors to halt the spread of the virus.

ITV, Marks & Spencer and InterContinental Hotels are among the firms that have either slashed or cancelled their dividends so far , with many more to follow, according to Lowcock.

Lowcock said: “The speed of the impact of coronavirus has left investors reeling and the policies being put in place to protect people have never been seen before. It has left entire industry’s unable to do business and put life for millions on hold. 

“For investors, there remains a lot of uncertainty, particularly those who rely on company dividends. The yields on some of the  largest companies in the UK look eye-watering, but it is hard to believe they are sustainable given the shock to global demand. 

“Dividend cuts are inevitable. While it is understandable firms are looking to protect themselves in the short-term, the impact of this on pensions and retirement income is going to be huge.”

Below, Adrian sets out five ways you can protect your income from the impending dividend shock set to sweep markets. 

How to protect your income from dividend cuts 

Cash buffer – This is the time to use your cash savings. Having a couple of years income in cash is very useful as it protects you from the volatility of markets because you do not have to draw down any cash during a sell-off. It means you have time to prepare for any drop in income and smooth out the impact. 

Annuities –  The interest rates on annuities are not attractive and given the recent cut in the Bank of England base rate, they are unlikely to get any more attractive any time soon. However, if you are a smoker or an older retiree then could be worth considering. Annuities offer something that stockmarkets cannot: a stable income come rain or shine.  

State Pension – Similar to annuities, the state pension is a good support for anyone who has finished working. It is there to ensure everyone has a minimum income from which to live off in retirement. 

Diversification – Just as it is important to make sure you hold a diverse range of investments spanning a variety of markets and asset classes, it is also imperative that you diversify your income that your investments hold. This means having income from equities to bonds and infrastructure to real assets. In addition, it is equally important to diversify within an asset class so if one company cuts it dividends then the impact on the income generated by your portfolio is more limited so you don’t suffer as much. 

Quality -  Not all income sources are equal. In the current climate, it is difficult to know which dividends are more secure.  However, there are things to consider which should help check whether or not a dividend is reliable. A high dividend cover is a good sign. It shows whether or not a company is paying out the dividend from profits. Cash on the balance sheet is also worth checking as it means a company can support a dividend if profits dip, for a little while. 

1 https://www.fool.co.uk/investing/2020/03/24/dividend-cuts-these-3-ftse-companies-just-cancelled-their-payouts/

Adrian’s top income fund ideas:

Threadneedle UK Equity Income - Richard Colwell is an experienced equity income manager and has been responsible for this fund since 2010. His focus is on stock selection, and he holds a blend of quality companies and out-of-favour businesses with recovery potential. The high quality investments have strong cash generation, which can fund both dividends and long-term growth. The recovery selections may not currently pay a dividend but he believes they have the potential to provide income and grow the value of the business in the future. The fund is unconstrained but is mainly invested in large blue-chip companies.

The largest position in the fund is the pharmaceuticals giant AstraZeneca. Colwell believes the company is well-positioned to grow its dividend because of its pipeline of new, higher-margin, products.

Fidelity Global Dividend - This is a core global income fund, which invests in companies offering a healthy and sustainable yield. Dan Roberts has managed this fund since its launch in 2012, with support from Fidelity's extensive research teams. Roberts considers himself a value investor and focuses on companies that can offer a good degree of capital protection during market downturns. This means the fund may lag in strong bull markets. Careful analysis of companies allows Roberts to identify those with stable finances and strong cash flow.

The portfolio currently favours pharmaceuticals and his largest company position is the Swiss giant Roche. The fund’s largest country exposure is the US, with holdings including US Bancorp, followed closely by the UK where the fund has exposure to both Relx and Unilever.

First State Listed Infrastructure - This fund invests in companies, mainly listed in developed markets, involved in various areas of infrastructure, including Energy, Communications and Transport. These sectors tend to be defensive and have reliable income-generating characteristics. The team is led by Peter Meany who initiated the strategy in 2007. The managers invest in infrastructure companies where they believe their true worth isn't being reflected in current price. Meany likes companies that provide essential services as these can often raise prices in line with inflation without seeing a drop in demand. This should help generate a regular income.