Firms cut dividends, what impact will it have on you?

Companies have faced challenges in the last 12 months and, as a result, many have cut or suspended their dividends. If a portion of your income is made up of dividends, it could affect you.

A dividend is a way of distributing some of a company’s earnings among shareholders. Not all firms pay dividends. Usually, it’s well-established firms with reasonably predictable profits that pay a dividend. It can be a way to create an income from your investments. The annual dividend allowance of £2,000 per tax year can make it a tax-efficient option too.

There are many reasons why a firm may cut or cancel dividend payments. For many firms, 2020 was a difficult environment to operate in and profits are likely to have fallen. This will be the reason behind many dividend decisions in recent months. However, firms may also choose to make changes to dividends if they need to invest in a project or are preparing for a major acquisition.

Over 500 companies listed on the London Stock Exchange made dividend cuts

Highlighting the scale of the challenges businesses battled in 2020 is the number of firms that decided to make changes to their dividends.

On the London Stock Exchange alone, more than 500 companies either cancelled, cut or suspended dividend payments in 2020, according to reports from City AM. This included 52 companies on the FTSE 100, an index for the 100 largest companies in the UK by value. The report demonstrates that it’s not just small businesses that have had their profits significantly affected, but large firms that are often considered relatively secure have too.

It’s a similar picture globally. The likes of Estee Lauder, Carnival, Boeing and Ford have all made adjustments to dividends.

So, will dividends return to ‘normal’ this year?

Some of the pressure faced in 2020 has reduced and as vaccines are given there are hopes that current restrictions will be eased. That being said, the UK is still in a third lockdown and restrictions will likely be scaled back gradually. Other countries are facing similar challenges. While there are positive steps, businesses, especially those within hospitality, will face ongoing obstacles that will affect profits.

While some dividends may resume in 2021, expect adjustments to continue this year and perhaps longer.

What to do if your income has been affected by dividend changes

If dividends make up part of your income, the changes may have an impact on your lifestyle and how you manage expenses. Here are four things to do if this is the case:

1. Don’t forget your long-term plan. When your income or investment values fall, it can be easy to make snap decisions that you haven’t fully thought through. Remember, you put a long-term plan in place, which should have accounted for volatility and changes, to build a diversified portfolio. It can be tempting to make changes now, but, in most cases, sticking to a long-term plan is the best course of action.
2. Reduce your outgoings. The most obvious course of action when your income is affected is to reduce your outgoings accordingly. Where possible cutting back on your expenses can ensure a reduction on dividends doesn’t affect long-term plans. However, we know this isn’t always an option, and there are other steps you can take too.
3. Draw on your rainy day fund. To provide security, you should have an emergency fund held in an accessible cash account. This can help provide an income when dividends are cut or you experience investment volatility. Ideally, this should be enough to cover between three and six months of outgoings. While you may not want to deplete savings, you’ve built up an emergency fund to maintain your lifestyle in circumstances like this.
4. Give us a call. Depending on your situation, you may be considering accessing other assets, such as an investment portfolio or pension, to make up the shortfall. Before doing so, it’s important you understand the long-term implications and where is best to draw from. This is an area we can help you with. For instance, accessing a pension sooner than expected may not be tax efficient if you have other assets available. We’ll work with you to understand what your options are and weigh up the pros and cons of each.

2020 was a year of ups and downs for investors, whether you’ve invested for growth or income. It’s served as a reminder that volatility does happen, it should be part of your investment strategy. Please contact us to discuss your goals and how to achieve them.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.