22nd February 2016
More than half of personal investors, at 56%, are anxious that companies may slash dividends this year.
Research from The Share Centre with responses from over 2,000 personal investors, was undertaken shortly before Rio Tinto, Rolls Royce and Centrica announced that they would be cutting their dividends, with BHP Billiton predicted to slash its dividend by as much as 75% when it reports this week.
The study also found that 70% of investors are looking for income from their savings, either as the principal goal in itself or in a balanced portfolio alongside a desire for growth.
Investors, particularly those at or nearing retirement and looking to drive an income from their savings, have been the group hardest hit by the prolonged historically low interest rates.
Cash savings have been delivering little in the way of income and many have turned to the stock market as an alternative, albeit this puts their capital at risk.
At face value a FTSE Index Tracker fund is yielding 3 to 4% at the moment.
However, that yield may prove illusory if companies cut those dividends.
This may be particularly relevant for the FTSE 100, which is dominated by miners, resource companies and banks.
Many of those companies have seen earnings suffer as a consequence of the low oil price or falls in commodity prices.
The broker group said though it is important that, when seeking income, personal investors look at dividend cover – the ability of the company to continue to pay its dividend out of earnings – as well as yield.
Dividend cover has fallen in recent years to a low of 1.2 times. This implies that companies have maintained dividends as earnings have fallen, presumably in the hope of earnings recovering.
This year may be the time that these policies become unsustainable and firms decide dividends must now be cut to reflect falling earnings.
Richard Stone, chief executive of The Share Centre said: “Investors have seen share prices fall sharply as a result of global economic concerns and the stock market enter ‘bear market’ territory having fallen over 20% since its peak in early 2015. Cuts to dividends, reducing income, will be a double whammy for personal investors.
“The research we have undertaken clearly shows investors are concerned and last week’s results from Rolls Royce indicate those concerns are well founded. As we continue through earnings season we may expect to see further dividend cuts.”