Investors take another hit as global dividends plunge again

Income investors have had a rough year, but new data shows there is light at the end of the tunnel. 

Dividends took a double-digit drop in the third quarter of the year in another blow for investors, but there are signs the worst could be over.

Global dividends fell by £41 billion in the three months to the end of September, a headline decline of 14.3%, according to the Janus Henderson Global Dividend Index, putting payouts at their lowest level since 2016.

While the news will add to the woes of investors who have had to suffer extremely choppy stock markets so far this year due to Covid-19, and the suspension of billions of pounds of dividends already in 2020, the decline was an improvement on the previous three months when dividends fell by 18%.

Why dividends differ around the world

Seasonal payment patterns in Q3 favour parts of the world where dividends have been more resilient, giving investors a boost.

China, Hong Kong and Canada were among the few major countries to see higher dividends. China’s big dividend season is in the third quarter, and payouts there were 3.3% higher year-on-year. Three quarters of Chinese companies raised payouts or held them steady.

US companies pay two-fifths of the world’s dividends, and have proved remarkably resilient during Covid. They fell just 3.9% in Q3 and were flat in Q2, with eight in 10 US companies holding or increasing their payouts in the third quarter. Lower share buy-backs bore the brunt of companies’ efforts to preserve cash instead of dividend cuts.

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Australia, the UK and the Netherlands were the worst bets for investors. Australian dividends have been among the hardest hit in the world, falling 40%, led by cuts from the banks. UK payouts were 41.6% lower. The cancellation of banking and brewing dividends were a big blow in the Netherlands.

However more than two-thirds of global companies increased dividends or held them steady in Q3, compared to just under one third that cut or cancelled them, an indication the worst for investors is past.

Reasons for optimism

Jane Shoemake, investment director for Global Equity Income at Janus Henderson said: “We have been encouraged by how resilient payouts have been in many parts of the world, especially in Asia, the US, Japan and emerging markets.”

Link Group, which also monitors dividends, found even the payout picture in the UK is becoming a little brighter, with a third-quarter decline significantly less severe than in the second quarter.

Susan Ring, CEO corporate markets at Link Group said: “UK Plc is not out of the woods, but the trees are perhaps thinning a bit. Our worst-case scenario has steadily improved all year and though UK investors face a historic decline in their income this year, the worst is now behind us.”

As companies become better able to assess the impact of the pandemic and the associated restrictions on their operations, she pointed out some are restarting dividends and a handful are even making up some of the lost ground.

Two-fifths of the world’s dividends have historically been paid by defensive sectors that are proving relatively insulated from the crisis, Shoemake added, “and the big growth sectors like technology are breezing through 2020 almost entirely unscathed”.

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With lockdowns stopping consumers hitting the highstreets, the worst dividend declines in Q3 came from consumer discretionary companies, down 43%. Car manufacturers saw the deepest cuts as buyers put big ticket purchases on hold, and leisure companies suffered being shut over lockdown.

Media, aerospace and banks were also severely impacted. The most resilient sectors were classically defensive pharmaceuticals, food producers and food retailers, which all saw higher payouts on an underlying basis.

Janus Henderson has calculated global dividends will fall 17.5% this year.

The start of 2021 will still be affected by cuts to dividends, but then things should pick up, said Shoemake. Janus Henderson expects payouts to be flat in the worst case, but rebound by 12% in the best case.

“The big question mark is over the decisions the regulators in the UK, Europe and Australia will make around banking payouts. And of course, so much depends on the pandemic and the severity and duration of any further lockdowns,” she said.