Challenging times ahead for dividend income, SMSFs warned
SMSF investors that are heavily reliant on dividend yields for their retirement income have been warned this strategy may soon become unsustainable, with many companies already cutting or reducing dividends.
La Trobe Financial chief investment officer Chris Andrews said there are two main risks for investors at the moment, particularly those in or approaching retirement.
“[The first concern] is that markets have gone back up to unsustainable levels and we might be caught in a bit of a yoyo phase with the market going up and down,” Mr Andrews explained.
“The second risk is that dividends are being cut across the board, and with the economy expected to be sluggish as we recover from the coronavirus, finding reliable sources of income is going to be a real challenge for the next four to six years.”
For SMSFs relying on dividends for a significant portion of their retirement income, Mr Andrews warned that this strategy is unlikely to be sustainable.
“The challenge for those investors will be to find new sources to augment their income, which they’re often relying on for living expenses in many cases,” he said.
A number of banks have already shelved or reduced their dividends, following Bank of Queensland’s decision to defer its payout in April, as reported by sister title Investor Daily.
Allan Gray chief investment officer Simon Mawhinney likewise predicts that while there will be some companies in a position to maintain or even increase dividends, such as Woolworths and Coles, other companies have experienced big losses and won’t be able to pay dividends without some sort of capital impost, elevating their gearing.
“In April, we had APRA writing to the banks and insurers requesting a prudent reduction in dividends and a materially reduced level of returns to shareholders over the coming months,” Mr Mawhinney said.
Mr Mawhinney predicts that for many ASX-listed companies, dividend yields will be close to zero in the near future.
Mr Andrews said the recent downturn in markets has highlighted the importance of planning for sequencing risk and liquidity in retirement portfolios.
“If possible, investors should ensure they have enough cash to meet a couple of years’ living expenses so that they can get through these periods of market volatility,” he explained.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.