The cuts to dividends in the reporting season as 70 per cent of ASX-listed companies shrunk or axed their payouts have shown that generating income from equities requires a long-term outlook, according to First Sentier Investors.
The total amount of dividends paid out by ASX-listed companies fell by 27 per cent between financial year 2019 and FY20, as around 70 per cent of companies reduced their dividends or paid none at all, First Sentier head of equity income Rudi Minbatiwala reported in an investor update.
“The companies that cut dividends weren’t exclusively the ones who suffered losses over the reporting period; some made the decision to pre-emptively shore up their balance sheets,” Mr Minbatiwala said.
“COVID-19 has hit different industries in different ways, and reinforced the notion that returning cash to investors is only appropriate when companies have some level of comfort about the future.”
Companies were slashing their payouts for a variety of reasons, with Mr Minbatiwala noting companies such as Ramsay Healthcare citing a drop in revenue, while others such as James Hardie performed well but chose to strengthen their balance sheet. While the circumstances varied, the companies had a common goal – to take a prudent approach to protecting capital in a time of uncertainty.
“It’s difficult to criticise boards that make such decisions for the short-term, as they are clearly looking to the medium- and long-term health of the company,” Mr Minbatiwala said. He added the developments underline a need for a more holistic approach.
“Dividend yields can be volatile and don’t tell the whole story of a company’s value; a more sustainable approach views income through the lens of total returns,” he said.
“We take a more holistic view of the investment options available to us, considering total returns and long-term earnings growth, in addition to dividend income.
“This approach provides the flexibility to be invested in the right stocks, at the right time, at the right price during different market conditions.”
However many people need income now, and to achieve this, Mr Minbatiwala said his strategy uses options to provide for the short-term.
“In our experience, a buy-write strategy delivers smoother returns through the market cycle,” he said.
“In addition to the two traditional streams of income generated from dividends and franking credits, options can exploit share price volatility to generate a third stream of income called option premium income.
“In a period where investors have been reminded that dividend yields are not as reliable as one might hope, we have found this diversified approach is an effective approach to providing income from equities.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].