Coronavirus Update #8

Coronavirus Update #8

Posted on August 13, 2020 at 4pm

Written by Square Mile Investment Services.

Most investors will be familiar with the power of dividends: £100 invested in the FTSE 100 in 2010 would be worth £111 today. With dividends, this £100 would be worth £166. So dividends represent 33% of the total return over this time period. Turning to the US, the figure for the S&P 500 is slightly lower: $100 invested in 2010 is worth $371 today, rising to $433 if dividends are included, with this component representing about 14% of the total return over this period. Within both of these markets these percentages increase over longer time periods and can be as high as 90% in some instances.

Concentration risk in the FTSE 100 is a very real phenomenon which most of us will be aware of. The top 20 dividend payers in the FTSE 100 account for over 80% of total payments with the top six being responsible for over 50%. However, the Covid-19 outbreak has led to a number of dividend cuts, notably amongst the banks, and since the start of the Covid-19 crisis over a third of the companies within the FTSE 100 have reduced or cancelled dividend payments. This is a remarkable figure because typically it is corporate earnings, not dividends that absorb the hit during difficult times. If the dividend yield on the FTSE 100 has halved (as it has for the year to date compared to 2019), then that compounding factor is weakened, reducing that component of dividend returns in future. This could potentially be problematic for investors.

We are very aware of the dividend headwinds impeding the future returns from many companies and have acted to lessen the impact this might have on our portfolios. The UK stock market is one of the worst affected given the number of financials and commodity-related businesses that go to make up the FTSE 100. But this, along with our view that Brexit risks firmly remain even if it is a story that has been relegated to the back pages more recently, is one of the reasons why we have less invested in the UK stock market than we historically would. This provides some natural protection from this year’s fall in dividends in the UK across the portfolios.

While it is hard to escape the full impact of dividend cuts on a global scale, we have ensured that the portfolios are well diversified and not all regions or even industries have been affected equally. We hold investments in a range of strategies that are able to provide an element of shelter from these dividend cuts. This includes infrastructure, for example, where companies such as utility firms are less exposed to what happens in the broader economy and so are able to continue to provide fairly reliable income streams. We also hold many strategies that focus on investing in growing businesses where growth in profits, not dividends, are the main driver of a stock’s investment return.

The portfolios are also well diversified in areas outside of equities such as fixed income. Fixed income assets represent a contractual obligation to pay interest and repay a loan. Whilst there will be companies that unfortunately go bust in the current climate and therefore will default on their debt, we believe the managers of the funds that we hold in the portfolios have the necessary skills to avoid most of these.

So overall, while widespread dividend cuts do impact the returns of many companies, by ensuring the portfolios are well-diversified both across equities and through holdings in other sectors, future returns are not wholly reliant on this one element.

Important Information

This document is issued by Prosser Knowles Associates Ltd. Prosser Knowles Associates Ltd makes no warranties or representations regarding the accuracy or completeness of the information contained herein. Nothing in this document shall be deemed to constitute financial or investment advice in any way. This document shall not constitute or be deemed to constitute an invitation or inducement to any person to engage in investment activity. Past performance is not a guide to future returns and the value of capital invested and any income generated from it may fluctuate in value. Data provided by Financial Express Limited. Prosser Knowles Associates Ltd is registered in England and Wales (04520041) and is authorised and regulated by the Financial Conduct Authority (446589).

Stay in touch

If you would like to keep up to date with current industry trends or receive details of our product developments, seminars, events and newsletters, just fill in your details below.

News Feed

How your clients can use Business Property Relief to cut their tax bill

If your clients are business owners, Business Property Relief can be a valuable Inheritance Tax relief. Assets...

5 ways that the UK has changed during lockdown

The lockdown due to the coronavirus pandemic has caused our lives to change in many ways, from being unable to...

5 scary financial mistakes to avoid this Halloween

From carving pumpkins to trick-or-treating, Halloween can be a fun experience for all members of the family an...

3 types of business protection all business owners should consider

Your business is something you take great pride in. It’s not just your livelihood, it may also reflect your ac...

Market & Portfolio Update – Quarter to 30/09/2020

MARKET AND PORTFOLIO UPDATE Written by Square Mile Investment Services. This is likely to have been the de...

Managed Portfolio Service Monthly Newsletter

September 2020 Update Provided by Quilter Cheviot August’s feel-good factor, epitomised for many by an escape...

Revealed: The value of financial advice

Financial advice can add real value to your life. Our guide looks at the ways financial advice can help you...

How the Pensions Lifetime Allowance works and what it means for your clients

Any client who makes substantial contributions to their pension, or has held their pension for many years, cou...

10 books with the best plot twists

The events of 2020 so far have been one unexpected turn after the other, as if we’ve collectively stumbled int...

What to do with your Child Trust Fund

Back in 2005, the Labour government were keen to tackle the issue of child poverty by giving every child in th...

10 ways you can spring clean your finances

Each year, the Great British Spring Clean encourages people to organise group clean-ups of local public spaces...

Market Update – September 2020

Written by Square Mile Investment Services. There has been considerable attention recently on the strong ra...

Managed Portfolio Service Monthly Newsletter

August 2020 Update Provided by Quilter Cheviot Despite global equities gaining 5% in July, it was another cha...

3 reasons clients should take financial advice on divorce

Divorce proceedings are challenging for anyone, but the financial implications can be particularly difficult t...

7 tips to increase your physical activity easily

We all know that regular exercise is essential for both physical and mental health. However, since gyms closed...