Savings & Investments

How should dividends feature in a portfolio in 2020?

By July 14, 2020 No Comments

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.

In the low-yield environment if 2019, it was commonly thought that it was hard to generate an income from an investment portfolio – in reality, this was not necessarily true. Provided you knew what risks were involved and where to look, it was possible to access dividend yields. Yet what about 2020, especially since COVID-19 pandemic has wreaked havoc on economies and led many companies to cut their dividends?

Is it still possible to generate an income from your investments during volatile markets such as this one, and how should dividends feature in one’s portfolio anyway? This article by our financial advisers in Burnley offers some thoughts on these important questions. If you’d like to speak to an independent financial adviser about your financial plan, you can reach us via:

T: 01282 772938

How COVID-19 changed the dividend landscape

To briefly recap, there are broadly two ways of investing – growth and income. The former is what financial advisers typically advocate for building, say, a pension fund. Here, the main goal is to increase the overall value of your capital invested over time. With the latter, the primary aim is to create a continuous – and even rising – stream of income.

Different types of assets – such as equities, bonds and property – might be used for growth investing depending on your risk appetite, financial goals and investment horizon. With income investing, however, this typically (but not always) takes the form of building a portfolio of companies which pay out dividends. These dividends effectively take the form of “thank you payments” to investors taken from company profits.

Such payments can be reasonably expected during times of economic and market growth. Yet within a crisis such as the COVID-19 pandemic, companies come under financial strain and are more likely to hold onto their profits rather than distribute dividends. For an income investor – i.e. someone whose portfolio leans heavily on dividends – such an environment can be disproportionately damaging.

Of course, dividends are not the only way of generating an income from your investments. After all, there are interest and rent payments too. Yet it’s important to note the impact that COVID-19 upon dividend investing and to highlight the need to be properly diversified. FTSE-100 companies, for instance, have reportedly already made dividend cuts of £30 billion this year to try and bring internal financial stability. Some large players such as HSBC, Lloyds and Barclays have announced that they are cutting dividends entirely for the foreseeable future.

The Bigger Picture

Whilst COVID-19 has been a big factor in reducing dividend payouts, it’s important to note that dividends have steadily been on the decline for some time now. Between 1986 and 2010, for example, high-dividend UK shares paid out about 4-6% per year. Yet between 2015-2020, savers in the UK have been losing about 20-30% of their capital value. Moreover, about ⅔ of UK dividend payments can be traced back to 10 stocks – which doesn’t leave much room for an appropriate level of diversification.

Yet despite this dividend environment and trend, this is not to say dividends have no place in an investor’s portfolio in 2020. It can be psychologically rewarding to see regular payments coming in from your investments, and – as stated above – it is possible to find opportunities if you know where to look, and what kind of risk is involved. Certain sectors and markets may hold out more promise than others, and a financial adviser can help you sift through these effectively.

Investing in infrastructure, for instance, could be an option to consider. These projects tend to have a long lifespan and cash flow is more stable, since the services are always needed – even during a downmarket or recession. Other possibilities to weigh up with your financial adviser include private credit and emerging market debt. With the former, this typically involves helping smaller companies to raise capital by offering loans, which then generate interest payments. With the latter, this involves buying the debt of different companies and countries. As you may have already noted, these types of investments tend to come with higher yield potential, but also carry a higher level of risk. Therefore, make sure you discuss these options carefully with your financial adviser if you are seriously considering them for your portfolio.

Conclusion & invitation

Dividend investing remains an attractive option for many investors, although the pandemic in 2020 has restricted the options for income investors within a longer-term trend of declining UK dividends. In the present conditions, the duration and type of investments that investors can (and will) purchase is also likely to be affected. A careful balance will need to be struck between shorter-duration assets (e.g. fixed income) which offer lower returns at minimised price/liquidity risk, and riskier investments (e.g. real estate/equities) which offer higher gains but greater risk.

There do remain some compelling, promising options for those willing to stomach the investment risk and who look in the right places. If you are interested in starting a conversation about your financial plan, then we’d love to hear from you. Get in touch to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.

Reach us via:

T: 01282 772938