Sharemarket COVID-19 impact: Beware the dividend yield trap
A sinking sharemarket has dramatically boosted the dividend yields of many Australian companies, but experts warn that stocks’ high payouts will not continue.
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Investors tempted by the high dividends on offer from Australia’s biggest companies should think twice before pumping more money into shares.
Many major stocks are paying dividend yields between 7 and 11 per cent – five times higher than bank deposits – but share specialists warn payouts will drop once the coronavirus hits company profit reports.
Acadian Asset Management portfolio manager Joanna Nash said dividend yields had climbed in recent months because of falling share prices – not rising dividends.
“Dividends are likely to be cut as companies focus on their balance sheets during the reduced economic activity rather than maintaining dividend payouts,” she said.
Ms Nash said the length of the current business shutdown period would determine how much company profits and dividends were impacted.
“While there does look like some good buying opportunities on the current yield levels, we have seen a number of companies in the last week suspend or cancel their previously announced dividends,” she said.
“This trend is likely to continue as companies report their full-year results and we see the impact on earnings over the next couple of months.
“Investors at this time need to be very wary of falling into the yield trap.
“Due to the large fall in stock prices, many stocks have a very attractive historical yield which will not necessarily be reflected in the second half of the year.”
Wealth on Track principal Steve Greatrex said he expected the coronavirus impact on dividends would be greater than the Global Financial Crisis in the short term.
“It will depend on how the covid curve flattens, how long before things return to normal, and also the level of government intervention,” he said.
“Anyone who is invested in long-term assets should not sell now.
“You could be crystallising a loss.
“Seek advice though about individual investments and your own situation.”
Mr Greatrex said investors who bought shares now should do well over the long term.
“Markets could still fall further though,” he said.
“As people say, picking the bottom of the market is like catching a knife.”
Ausbil Active Dividend Income Fund portfolio manager Michael Price said dividends would drop as company earnings fell.
“During the GFC, 63 per cent of companies reduced their dividends and a further 3 per cent suspended them completely,” he said.
“Dividends paid by the market fell by 16 per cent between 2008 and 2009.
“At this stage it looks like the fall in economic activity is likely to be at least as large as in the GFC, but for a shorter period of time.”
Government and central bank stimulus already exceeded that of the GFC, Mr Price said.
“So while dividends may fall just as much, it is quite possible that they rebound faster than after the GFC,” he said.
“As an example of this, we have already seen more companies suspend their dividends than occurred during the GFC.
“This indicates that dividend cuts could be quite severe, but are expected to be more temporary.”
Shareholders should prepare for “a meaningful drop in dividends, especially in the shorter term”, Mr Price said.
“Relative to other investment alternatives, the income from shares is likely to remain very attractive.”
Originally published as Sharemarket COVID-19 impact: Beware the dividend yield trap