Insights

Markets & Research
Navigating a new landscape for dividends
Dale Hanks
Investment Director
Marc Nabi
Investment Director
KEY TAKEAWAYS
  • 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, Capital Group 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.


Capital Group equity analysts collaborate with the 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.

Capital Group 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.


Dale Hanks is an investment director with 33 years of investment industry experience. 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 investment director with 31 years of investment industry experience. He holds an MBA in finance from New York University and a bachelor’s degree in accounting from the University of Michigan.


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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.

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