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Our views 31 May 2020

Equity income at a time of dividend destruction

5 min read

The shock and uncertainties brought about by COVID-19 have resulted in many businesses around the world deciding to reduce the distributions they make to shareholders. As equity income investors, with clients who are attracted to the combination of regular cash windfalls and lucrative capital growth over time, this is particularly relevant.

We do not take lightly the fact that our clients are likely to receive lower income this year, especially since dividend sustainability is at the heart of our investment process. Dividend sustainability and growth come from long-term cash generation and balance sheet strength, and so it is natural that clients might wonder whether the reduction in income is an indication that we are failing to live up to our words.

Is the dividend cutting justified? It is important to look at the context. The pandemic has resulted in a great deal of uncertainty for all businesses. Even those whose trading is currently unaffected still face potential issues relating to supply chains, distribution networks or employees.

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