Dividends slashed to 5%, fund manager advises
As the bear market continues, investors are being reminded that, historically, dividends are less volatile than share prices, with returns predicted to be significantly higher than cash, a fund manager has highlighted.
According to Dr Don Hamson, managing director at Plato Investment Management, while some sectors have been completely closed off, investors should still see solid dividend returns.
“While various unknowns remain in this rapidly evolving environment, our current expectation when taking into account all the information currently available on the COVID-19 pandemic is an overall 30 per cent dividend cut across Australian equities over the next 12 months, based on information available at 31 March 2020,” Dr Hamson explained.
Dr Hamson believes when adjusting for likely dividend cuts, Australian investors should expect a gross yield including franking from Australian equities over the next 12 months of around 5 per cent, which is still 3 per cent higher than a savings account.
Instead of being market-wide, the dividend cuts will be very stock and sector-specific, and dividend traps are about to become a lot more prevalent.
“We believe iron ore miners are at the lower end of the dividend cut risk spectrum. Expected stimulus from China will require iron ore, and there’s been supply issues in India and Africa, which have supported prices,” he said.
“Telcos and consumer staples should also be able to avoid major dividend cuts.
“Significant dividend cuts are likely from the banking sector, and it is our belief that smaller banks will be hurt more than larger banks, due to thinner margins and narrower funding avenues.
“We also expect dividends from miners without exposure to iron ore to be hit, along with the consumer discretionary, energy and REITs sectors, particularly retail REITs.”