MARKET COMMENTARY

Dividend Income Will Be Harder to Find

06.04.2020 - Carin L. Pai, CFA

Key Takeaways
  • Many companies have cut dividends in response to the financial impact of the COVID-19 crisis.
  • Today’s combination of low interest rates and lower dividends has made finding portfolio income more challenging.
  • We believe large technology, drug, beverage and personal care product stocks will be able to provide a reliable source of dividends.
Dividend Cuts Are on the Rise

Dividends looked strong entering 2020, increasing by about 3% in the first quarter.[1]  But companies had not felt the full lockdown effects yet.  Since then, many either temporarily stopped payments or slashed them, due to reduced cash flows and revenues.

The number of Russell 3000 firms that cut or stopped dividends has reached the highest level since the Great Financial Crisis (GFC). We expect even more firms to follow this trend, with dividends falling by 15% to 35% this year.[2]  While our team believes some dividends will bounce back after the crisis, not all of them will.

Chart: Firms Are Reducing Dividends at the Highest Rate Since 2009

Number of Russell 3000 stocks decreasing or stopping dividends by year


Source: Factset, as of 5/15/20.

Elevated Payout Ratios Are an Early Warning Sign

We are actively evaluating companies to determine whether they can maintain their dividends.  A company’s payout ratio is a good predictor of future dividend cuts. It shows the proportion of earnings a company pays shareholders in the form of dividends.

The average payout ratio for the S&P 500 has risen from a low of 25% to an above-average 40%. This partly reflects the GFC recovery and earnings growth over the past 10 years.[1] Rising payout ratios coupled with an earnings increase are seen as a positive. A high ratio with slowing or declining earnings is a warning sign. With S&P 500 earnings expected to drop owing to the downturn, the implied payout ratio could nearly double—if dividends are maintained.  That signal alerts us to companies with potential problems paying their dividends. 

First Wave of Cuts for the Harder-Hit Sectors

We believe regional banks, oil and gas producers, real estate firms and brick-and-mortar stores will have difficulty maintaining their payouts. These industries are more likely to suffer because their cash flows are particularly vulnerable to high unemployment and falling consumer demand. These factors are likely to dominate the economic picture for some time.

Areas of Resiliency

We believe parts of the market that have maintained earnings and cash flow growth, with reasonable payout ratios and low debt levels, will be able to support dividend payments.  This includes large technology, drug and medical equipment companies, beverage makers and personal care product stocks. 

Within these areas, we look for high-quality companies that have strong balance sheets, consistent cash flows and proven management teams. We favor many of these firms from both income and growth perspectives due to their innovative qualities.

[1] Source: Bloomberg, as of April 30, 2020.

[1] Source: Fiduciary Trust estimates, as of May 19, 2020. Estimate is for Russell 3000 Index.

[1] Source: Franklin Templeton, as of April 30, 2020. Based on S&P 500.


The information provided is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy, or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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