Prepare now for dividend slide – BJM tells investors

Dividend yields from equities are at historical highs relative to government bonds, but investors should prepare now for the prospect of falling dividend payouts.

The alert to investors reliant on this form of income has been sounded by Barnard Jacob Mellet Private Client Services (BJM PCS), a wealth company that serves many high net worth individuals, including retirees that have to optimise the return from balanced portfolios.

Mark Appleton, Chief Investment Officer of BJM PCS, warns that in a relatively tight credit environment, the emphasis within companies is switching towards maintaining balance sheet strength at the possible expense of dividend payouts.

He adds: “Budgeting is becoming difficult in an increasingly uncertain economic environment and companies are clearly becoming more cautious.

“The approach to dividend payouts will vary from company to company. Some will keep dividend payout ratios constant and reduce payouts in line with earnings declines, while others, especially those with significant capital expenditure commitments, will choose to up their cover ratios or even in extreme cases, skip a dividend payout in its entirety – the examples we have seen of late in this case are Anglo American and Sun International.”

BJM PCS forecasts that over the next year the overall South African corporate earnings base could be down in excess of 15%, with resource company earnings bearing the brunt of these reductions.

In tough times, such as those we are experiencing now, investors tend to put more emphasis on income. Dividends are clearly important and investors looking for yield become more sensitive to changes in dividend flows.

BJM PCS is managing dividend expectations within its client base and focuses on those companies who even using very conservative dividend projections still reflect an attractive dividend yield.

“Overall we expect dividends to fall over the next 12 months,” says Appleton. “But even if we assume declines in excess of 30%, the yields in many instances still look attractive especially when these are compared to bond yields.”

The general advice from BJM PCS to income-sensitive investors with balanced portfolios is to include a mix of steady income-producing assets such as money market, bonds, property and preference shares. The firm’s wealth specialists caution, however, that specifics differ from case to case and expert advice is necessary to achieve the optimum outcome.

“Our local listed property portfolio reflects a yield of just over 9%,” says Appleton. “The preference share portfolio yield is currently around 10% (after tax). In a declining interest rate environment we prefer exposure to preference shares rather than money market investments.”

BJM PCS anticipates a further decline in interest rates of 250 basis points.

“It’s therefore important for these investors to stress test and review their income requirements and asset allocations,” notes Appleton.