In this low interest rate environment investors are, unsurprisingly, hungrier for income from shares to replace the interest they used to receive on their cash savings.
However, the dividend environment may not be as straightforward as it seems – certainly for local people investing in UK FTSE 100 companies.
We have seen big names such as Tesco, Standard Chartered and mining giant BHP Billiton cut their dividends, while other major UK companies have continued to pay out high dividends even when revenues are trailing off.
So just how secure are dividends? No one should assume regular, sustained income is a given and investors will want to make sure they don’t become victims of a cut to their portfolio income.
Assessing the cash generation of any existing or potential investment remains paramount. At Canaccord Genuity Wealth Management an important tenet of our investment strategy is a focus on the security of dividends when assessing investments, so much so that we have exited positions in companies where we feel that future cash flow will be insufficient to sustain shareholder payments.
This is ever more important when dividends offered by the UK’s biggest companies are reaching new highs compared to their earnings. Over the last year dividends paid out by FTSE 100 companies have been worth more than 70% of those companies’ earnings, so how long can those organisations keep protecting them?
Furthermore, normally, ultra-low interest rates provide a strong environment for high yielding shares but this era has lasted for much longer than expected. So, added to the dividend income quandary is the fact that the resulting investors’ ‘hunt for yield’ has also driven such assets higher, making them relatively more risky.
In summary, as a result of the underlying back drop, investors are wise to be more wary than usual of investing in stocks where a dividend cut is likely. Going forward, vigilance is the watchword.
