interactive investor’s experts share their views on bank dividend cuts, the impact on income funds and 10 most-popular stocks.
UK Banks have historically been a popular choice for income seekers, and in the current tax year up to 31 March 2020, three of the top 10 most-bought direct equities in the interactive investor SIPP were banks (see table below).
interactive investor today publishes the most-bought direct equities in its SIPP over the current tax year to date, together with an updated UK dividend tracker covering the last long 15 days, alongside comment from Lee Wild, Head of Equity Strategy; Dzmitry Lipski, Head of Fund Research, and Richard Hunter, Head of Markets. What’s next for income seekers?
Lee Wild, Head of Equity Strategy, interactive investor, says: “A few short weeks of dividend suspensions and cancellations look set to become a long hard slog for income seekers as companies rush to save cash amid the unprecedented coronavirus lockdown.
“With no idea when the virus will end, or little clue what the financial impact will be, businesses are having to prepare for the worst as income investors’ patience gets tested like never before. Investors will have to get used to receiving their dividend income from a shrinking pool of stocks for the time being and income diversification – both at a sector and country level, will likely become even more key.”
Dzmitry Lipski, Head of Fund Research, interactive investor, says:
“For fund investors, financials are very popular with UK equity income funds and especially in strategies that have a value tilt. The bank dividend cuts compound issues the UK equity income sector has grappled with for years in terms of concentration of income – more than 50% has been concentrated to a few stocks. This is how many fund managers and DIY investors end up with a large concentration of banking stocks. Global diversification of income is now even more important.”
Most bought direct equities in interactive investor SIPP in current tax year to 31 March 2020 (in rank order)
Richard Hunter, Head of Markets at interactive investor, says: “The announcement that banks will be suspending existing and future dividends and share buybacks ticks the boxes of moral duty and an additional capacity to lend, but from an investment perspective it removes a core plank of the case for buying bank shares.
"The current yield of the UK banks, soon to evaporate, is testament to the fact that some are core portfolio holdings. Lloyds Banking Group (LSE:LLOY) has a dividend yield at present of 10.5%, Barclays (LSE:BARC) 9.6%, The Royal Bank of Scotland (LSE:RBS) 4.4%, HSBC (LSE:HSBA) 9% and Standard Chartered (LSE:STAN) 4.9%.
"From a technical perspective, it also begs the question of how or whether these share prices will be compensated for the previous ex-dividend markdowns. On ex-dividend day, share prices are reduced by the amount of the upcoming dividend, which already applies to Barclays and HSBC (both 27th February), Standard Chartered (5th March) and Royal Bank of Scotland (26th March). It is unclear whether this can be reversed.
"In addition, if the European experience is applied, the announcement of dividend and share buyback postponements had the effect of wiping off the supposed savings from the share prices and therefore market capitalisation of the banks in question. In early trade in the UK, that seems to have been echoed against a weaker market backdrop.
"Already facing the prospects of lower margins, given the historically low interest rate environment, as well as the possibility of an increase in bad loans (impairment losses), banks will face general economic challenges in their quest to keep the wheels of the economy oiled. However, they are undoubtedly in a significantly stronger capital position to withstand these shocks, following regulatory tweaks to their capital cushions after the financial crisis of over a decade ago.
"The announcement comes at a time when income investors are faced with a rapidly shrinking universe.
"As such, the search for dividend income may have to be found in switching to a classically defensive strategy.
"Companies such as Unilever could benefit from the current propensity of consumers to hunker down and currently yields around 3.4%. Similarly, Reckitt Benckiser (LSE:RB.) yields around 2.8%. Elsewhere, the utility stocks can come into their own in parts of the economic cycle such as these, and examples within the FTSE 100 include SSE (LSE:SSE) (previously Scottish & Southern Energy), where the current dividend yield is 7.1% and United Utilities (LSE:UU.) 4.6%.
"An interesting observation would be to look at another such sector in the form of the supermarkets. Investors can expect financial caution here also, particularly given the sector’s tendency to have diversified away from just grocery, but these are clearly reaping some rewards at present. Not always the highest of yielders, the dividends may be maintained in the face of current trading, with William Morrison (LSE:MRW) presently yielding 3.8%, Tesco (LSE:TSCO) 3% and Sainsbury's (LSE:SBRY) 5.4%.”
interactive investor dividend tracker
|Company||Future dividends suspended or Previous dividend cancelled||Money saved||Date of dividend decision|
|Royal Bank of Scotland||Both||01/04/2020|
|Lloyds Banking Group||Both||01/04/2020|
|St Modwen Props||Previous||£11.3m||31/03/2020|
|Hill & Smith||Previous||27/03/2020|
|Johnson Service Group||Previous||20/03/2020|
|Croma Security Services||Previous||19/03/2020|
Source: interactive investor - not exhaustive and whilE every effort has been made to keep this accurate, it should not be relied upon.
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