Navigating a new landscape for dividends
Dale Hanks
Investment Director
Marc Nabi
Equity Investment Director
  • Dividend-paying stocks face pressure on many fronts today.
  • Fundamental research and diversification are the keys to investing in income-oriented companies.
  • Given ultralow interest rates, dividend payouts remain a crucial source of investment income.

With much of the world in quarantine, dividends are at a crossroads.

As the global economy remains essentially shut down, many companies face tough choices when it comes to returning cash to shareholders. Dividend cuts and suspensions have jumped to the highest level in more than a decade. But even in this environment, some companies have maintained payouts and even raised them.

More than ever, this divergence in dividend commitment emphasizes the need for stock-specific research to help identify high-quality companies that can weather the storm. Interest rates also remain ultralow in developed markets, further underscoring the need to find companies that can generate sustainable income for investors who may be struggling to find it in bonds.

: Dividend-paying companies remain an important source of income for investors. The chart compares the yield of the 10-year U.S. Treasury with the dividend yields for the S&P 500 and the MSCI ACWI. As of March 31, 2020, the yield for the10-year Treasury was 0.70%, the yield on the S&P 500 was 2.35% and the yield on the MSCI ACWI was 2.99%. Sources: MSCI, Refinitiv Datastream, Standard & Poor's

Dividends face challenges

In periods of economic duress, dividend cuts and suspensions are not unexpected. In the United States they have reached a level last seen during the Great Recession, as sales have slowed and companies scramble to preserve cash. In Europe, dividends have come under immense political pressure as government regulators warn banks to preserve capital amid the coronavirus pandemic.

The chart details the number of dividend cuts or suspensions for U.S. companies by year from 2005 through April 23, 2020. In 2005 and 2006, that number totaled 14; in 2007, 19; in 2008, 122; in 2009, 138; in 2010 and 2011, 15; in 2012, 20; in 2013, 17; in 2014, 4; in 2015, 28; in 2016, 42; in 2017, 10; in 2018, 5; in 2019, 11; and in 2020, 111. Source: Wolfe Research, LLC.

Many investors may be surprised to learn the degree to which ethical and social considerations are influencing dividend policy in a wide range of industries. This is especially prevalent among companies in France, Spain and Germany.

Many European companies have delayed annual meetings to reevaluate conditions later this year. Given that some companies in Europe pay dividends only once or twice a year, instead of quarterly, the monetary impact and uncertainty is significant.

Amid plummeting oil prices, Royal Dutch Shell on April 30 reduced its dividend for the first time since 1945, cutting it by more than 60% to 16 cents a share.

Rays of hope

Despite a severe global economic downturn, not all companies are following the same path. Many remain committed to sustaining and even increasing their dividends.

For example, in Europe, Nestlé and Zurich Insurance accelerated plans to hold virtual annual meetings and committed to paying dividends as planned. German chemical giant BASF is sticking to its payout, and several utilities in the U.K. have expressed strong support for sustaining their dividends during this turbulent time.

Among U.S. companies, Procter & Gamble and Johnson & Johnson have raised their disbursements, and Starbucks is maintaining its dividend. Even in the hard-hit oil sector, ExxonMobil said on April 29 it would maintain its quarterly dividend despite reporting a $610 million first-quarter loss.

Assessing dividend sustainability

As companies take different paths, our investment analysts are rigorously scrutinizing balance sheet strength, financial conditions and cash-flow outlooks on a company-by-company basis.

Take the U.S. communications services industry. The business has consolidated in recent years, making several companies both providers and distributers of content. This consolidation has had financial ramifications.

AT&T acquired DirecTV and, more recently, Time Warner. As a result, AT&T’s net debt rose to $150 billion and its earnings became more economically sensitive due to the cyclical nature of the advertising business. On the other hand, Verizon Communications has roughly $130 billion of net debt and less exposure to advertising. Verizon stock has yielded less than AT&T, but its dividend is perceived to be safer by the market.

Our equity analysts collaborate with our fixed income team to evaluate the risk that a company may cut its dividend to avoid a credit rating downgrade. High levels of corporate debt could impact dividend sustainability.

The mountain chart represents the period from 1989 through January 31, 2020. It shows graph lines for dividends, buybacks and free cash flow, along with gray bars to reflect recessionary periods. Since 2013, the amount of money spent by corporations on dividends and buybacks has consistently exceeded free cash flow. In 2013, dividends and buybacks amounted to $775 billion, compared with $744 billion for free cash flow. As of January 31, 2020, dividends and buybacks amounted to $1.25 trillion, compared with $1.1 trillion for free cash flow. Source: Capital Group. Universe is made up of 4,425 non-financial U.S.-based companies that are meant to be a proxy for the U.S. public equity market. Data as of January 31, 2020. Data shown in USD.

Our analysts and portfolio managers are also weighing subjective issues that could impact the dividend, such as:

  • Acquisitions: Companies may prioritize acquisitions, buying smaller or weaker competitors for strategic reasons while valuations are distressed, and cutting dividends to accelerate debt repayment.
  • C-suite changes: A recently appointed CEO or new chairperson of the board may not have the same level of commitment to past dividend policies.
  • Board composition: Some board members may be executives of other companies who have cut dividends and may not have any qualms about doing it again.

Consider upgrading your portfolio

A new paradigm is emerging for dividend-paying stocks and, therefore, we believe it is important to upgrade the quality of income-oriented portfolios. In our view, an effective approach involves:

  1. Diversification: Generating a disproportionate amount of income from a given sector or region can increase the risk of a severe reduction of dividend income. Companies in many sectors outside of traditional areas, such as technology and health care, now pay dividends. A global approach, where appropriate, also expands the pool of dividend-paying companies, providing further diversification.
  2. Fundamental research: Financial and liquidity analysis can help assess the ability of a company to pay its dividend in a variety of scenarios through collaboration with equity and fixed income analysts.
  3. Holistic perspective: This involves assessing myriad qualitative and subjective factors including any recent management changes, the composition of the board and the company’s approach to M&A during a time of distress.

Dale Hanks is an investment director with 36 years of investment industry experience (as of 12/31/2022). He holds a master’s degree in theological ethics from Fuller Theological Seminary and a bachelor’s degree in international political economy from the University of California, Berkeley.

Marc Nabi is an equity investment director with 35 years of investment industry experience (as of 12/31/2023). He holds an MBA from New York University and a bachelor’s degree from the University of Michigan.

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. Small-company stocks entail additional risks, and they can fluctuate in price more than larger company stocks.

Standard & Poor’s 500 Composite Index is a market capitalization-weighted index based on the results of approximately 500 widely held common stocks.

The MSCI ACWI is a free float-adjusted market capitalization-weighted index that is designed to measure equity market results in the global developed and emerging markets, consisting of more than 40 developed and emerging market country indexes.

MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. You may not redistribute the MSCI data or use it as a basis for other indices or investment products.

Standard & Poor’s 500 Composite Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Capital Group. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part is prohibited without written permission of S&P Dow Jones Indices LLC.

Never miss an insight

The Capital Ideas newsletter delivers weekly investment insights straight to your inbox.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only. Use of this website and materials is also subject to approval by your home office.
American Funds Distributors, Inc.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.