Dwindling dividends, the untold story: banks not the only ones reducing payouts

A reduced capital value of portfolios, with a dramatic fall in the income that derives from them, may become the new normal.

For many years ANZ has been the first of the big banks to announce its interim results in the April-May reporting period, including details on what interim dividend it intends to pay its shareholders.

This year the picture is very different and offers a wake-up call to investors at every level.

National Australia Bank jumped in first, reporting on April 27 that it would cut its dividend to 30c a share, a drop of 64 per cent on last year’s interim dividend.

In relatively quick succession, ANZ then announced that it would “deliberate on whether to pay an interim dividend and provide an update in August”, and Westpac deferred its decision on a dividend “in the face of concerns over significant increase in bad debts”.

Commonwealth Bank — which paid an interim dividend in March ($2 a share, unchanged) — will announce its full-year results on August 12. CBA’s dividends, if declared, are normally paid in ­September.

This unfortunate string of announcements from three of the big four banks will have a huge effect on shareholders.

For many years, dividend income from ANZ, NAB and Westpac has arrived in retirees’ bank accounts like clockwork every July and December, and from CBA in March and September. Payments were at best like big, regular presents from a generous aunt.

Most investors — and the vast majority of retirees — will have read these announcements with a growing sense of dread. The big four banks traditionally represent a large percentage of most retirees’ portfolios — in many cases above 50 per cent — and retirees rely heavily on the dividend income from them.

Retirees know that a major drop in dividend income will ­severely curtail their lifestyles, and many will be faced with the un­palatable option of dipping into their savings to make ends meet.

In times of stress, many companies reduce dividends to fortify themselves and protect their balance sheets. By contrast, during good times companies often announce special dividends, sharing profitability with shareholders. Both represent good financial stewardship.

The COVID-19 pandemic has put all boards under pressure. Many have raised funds. There is not one sector in Australia that will escape unscathed from the pandemic; boards will act in the best interests of their companies and the companies’ owners (shareholders).

NAB is one of several companies in the top 50 to severely cut back its interim dividend. But there is a hidden story in the other companies that reduced their dividends by more than 40 per cent, including: James Hardie, Aristocrat Leisure, South32, Macquarie Group, AMP, Vicinity Centres and Oil Search. (The first two suspended dividends until further ­notice.) 

Another seven top-50 companies reduced dividends by between 14 per cent and 35 per cent: Wesfarmers, Woodside Petroleum, Orica, IAG, Caltex, AGL and Amcor.

All in all, 18 companies in the top 50 announced reductions or suspensions of dividends. Four reported no change, while Aurizon, Rio Tinto, CSL, BHP, Origin Energy, Fortescue Metals and Lendlease all announced dividends that increased by 20 per cent or more. 

As an illustration of the effect of falling dividends, one of our clients has a $700,000 share portfolio with major investments in the big four banks as well as BHP, Rio Tinto, Woolworths and Telstra.

Last year this yielded grossed-up income of $26,200 for the half year. If Westpac and ANZ end up paying no dividend, income from the same portfolio for the half year will be $15,200, a drop of 42 per cent.

What’s more, the portfolio itself has reduced in value by about 18 per cent to $575,000 due to falls on the ASX.

The loss of dividend income, along with a dramatic drop in share prices, coincides with historically low interest rates that will affect income from bonds and other fixed-income investments. An unpalatable possibility is that investors may find that these investment conditions remain for the next 18 months to two years, possibly longer.

A reduced capital value of portfolios, with a dramatic fall in the income that derives from them, may become the new normal.

Many investors may seek alternative income-generating opportunities, tempted by current advertisements in newspapers and magazines offering attractively high yields on “safe” investments. Many of these are in no way safe. Some even have a whiff of Ponzi schemes about them — offering ridiculously high returns for the nature of the investment.

Investors would be well advised to remember Pyramid Building Society, OST Friendly Society, ­Estate Mortgage and a plethora of others.

Rodney Horin in a director at Joseph Palmer & Sons, wealth managers and aged-care consultants.

www.jpalmer.com.au