More than eight in ten income investors (83%) are concerned about a potential loss of income from dividend cuts caused by COVID-19, according to new research from the Association of Investment Companies (AIC) conducted by Research in Finance.
In the AIC’s survey, 89% of income investors’ portfolios have been affected by the pandemic with 41% having seen a ‘considerable’ or ‘big’ impact.2 Nearly a fifth (17%) have had to change their plans or lifestyle in response. Of these, 63% have cut back on non-essential items or activities, 39% have cancelled or changed holiday plans for financial reasons and 19% have pushed back retirement plans.
UK dividends fell by 54% between April and June in response to the COVID-19 crisis compared to the same period last year. Dividends globally are forecast to be between 17% and 23% lower in 2020 due to the pandemic.
Investors move into growth
More than a quarter (27%) of income investors affected by the cuts have made changes to their portfolios in response. While 46% of these have looked to alternative income-producing investments such as property and infrastructure, nearly half (49%) of them have moved into growth investments to try and compensate for lost income. The research suggests income investors affected by UK dividend cuts are increasingly embracing global strategies, both global equity income and global growth.
Investment companies prove reassuring
There is a noticeable link between holding investment companies and feeling more secure about income: 21% of investment company users were not at all concerned about potential losses of income, compared with 11% of non-investment company users. Among those who held the majority (>50%) of their portfolio in investment companies, the percentage of people who were not at all concerned increased to 37%.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Our survey shows that the pandemic has affected almost every income investor, leaving many worried about whether their investment income will be enough to meet their future needs.
“Although we are less than a year into the pandemic, dividend cuts have already had very real consequences for some investors. One in five have been forced to change their lifestyle or future plans. The majority of these have had to cut back on luxuries, some have cancelled holidays for financial reasons and sadly some have pushed back their hoped-for retirement date.
“With a never-ending barrage of bad news, it’s understandable that income investors may feel under siege. But the research also revealed investors with investment companies are less concerned than others about a loss of income from their portfolios. A key reason for this is that investment companies can reserve some of their income to smooth their dividends over time, helping them achieve long track records of dividend growth. For example, the 19 ‘dividend hero’ investment companies have increased their dividend every year for 20 years or longer. It’s important to remember, however, that dividends and dividend increases are never guaranteed.
“Besides dividend smoothing, other income advantages of investment companies include the ability to invest in higher-yielding hard-to-sell assets such as infrastructure and property, as well as the option of supplementing income from capital profits in cases where a higher income is important to shareholders.”
The importance of consistency
Income investors care about the level of dividend yield but consistency of income was also cited by many respondents as an important factor. Half of investment company users (51%) consider the ability to smooth dividends a main benefit of investment companies. A similar proportion (47%) identify long track records of dividend growth as a primary benefit.
Investment companies have the ability to hold back up to 15% of the income they receive each year in a revenue reserve. They can then use this reserve to boost dividends during difficult years, helping investment companies such as the dividend heroes to build up long track records of dividend growth.
Aspirations for family, renovations and future care
In addition to providing an income to live off in retirement or to supplement a salary, income investors report a range of aspirations for their portfolios. These include helping with children’s school and university fees, funding large one-off purchases such as home renovations and providing for future care costs.
What the investors say:
“We don’t know what the future holds. This could be the new normal couldn’t it? The nice 5% or 6% or 7% dividends that you get from some companies, maybe that is never coming again. It could kill it off, so that is a worry for the future definitely.” Male, 53.
“Things that we have used [the income] for then, we have to think twice now. It tends to be that discretionary spending, be it holidays or big expenditure. Will we postpone those? Possibly.” Female, 52.
“At the moment I am lying very low and I haven't really ventured into looking at my investments in these past couple of months. I don’t want to look at it and then see that hit and feel down again. […] I am not buying any more or doing anything until we know how the industry is going to do. It is a good time to buy because prices seem to have gone down a bit more, but it is whether it is going to recover and how it is going to recover in the long term.” Female, 43.
