Should you face the music over dividend cuts and dip into capital? It’s seen as taboo – but some experts say now may be the time to break the golden rule
- No fewer than 35 FTSE 100 firms have cut, cancelled or suspended dividends
These are dispiriting days for those needing a decent income from their investments, and for anyone in that situation, tough decisions now loom.
Alarmingly, negative interest rates are on the Bank of England’s agenda, making deposit-based savings even less attractive.
At the same time, many companies have cut their dividends either because they have been ordered to by regulators or because of a general view it is wrong to make distributions during the pandemic.
On song: The Hipgnosis Songs trust, which provides a yield of 4.3 per cent, acquires rights to hits from artists like Blondie, Stormzy and Adele (pictured)
No fewer than 35 FTSE 100 firms have cut, cancelled or suspended dividends this year. Payouts could be as much a third down on 2019 at just £60billion.
So with income streams drying up, is now the time to think the previously unthinkable, and dip into your capital?
For many, the notion is anathema. Conventional wisdom is that investors should preserve their capital in order to generate future returns.
But with dividends unlikely to resume their former flow any time soon, increasing numbers of advisers are suggesting it is possible to sell some shares and take profits to maintain the income levels you need – provided you proceed with care.
Rosie Bullard of wealth manager James Hambro says the belief that capital is inviolable is ingrained in the national psyche thanks to the revenues that the landed gentry earned from their estates in centuries past.
Ancestral acres were only sold as a desperate measure. ‘The idea that you should never use your capital was still fine in the 1980s, the 1990s and in the early part of this century,’ she says.
‘But the world has changed, particularly for investors who have depended on UK shares, like BP.’
Since BP and other formerly generous firms may not reverse their dividends cuts in the near future, Bullard suggests investors should aim for a total return – a mix of income, plus capital growth.
She says: ‘Over the past year, BP has paid a dividend but this was lost in the share price decline, whereas Microsoft gave a total return of 50 per cent in price growth and dividend.
‘We’re not writing off income generation, but we recommend to clients that they check at the end of the year what income their portfolio has generated.
‘They can then see if they can use some capital gains to supplement. Remember you have a capital gains tax (CGT) allowance of £12,300.
‘Once this is used up, CGT rates are, at least for the moment, lower than income tax rates.’
For some investors, this strategy may involve too much risk. By dipping into capital, you are reducing the pot on which you earn your profits and dividends in the future. But re-thinking your approach can still be a way to boost your earnings.
Investment trusts can provide growth and income because they can dig into their reserves.
Murray Income (yield 4.8 per cent) is one of the 19 trusts that has increased its dividends for more than 20 years. Lately this is thanks to its holdings in Astrazeneca and other pharmaceutical companies.
Other trusts on the dividend heroes list compiled by the Association of Investment Trust Companies include City of London (yield 5.9 per cent) whose holdings include BAE Systems and Persimmon.
These groups have recently resumed payouts. Regardless of the controversy, some companies still feel they have a duty to shareholders.
As a result, the Footsie should still yield about 3.5 per cent this year, according to AJ Bell, the investment platform.
However, the 1.4 per cent aggregate dividend cover (a measure of a company’s ability to afford the dividend) is somewhat thin, casting doubt over companies’ future ability to reward shareholders as the recession bites.
And the most munificent business is tobacco group BAT, which is anathema to some investors.
Some trusts aim to appeal to the growing tribe of investors who want an ESG (environmental, social or governance) element to their portfolio, plus an income.
James Carthew of analytics group Quoted Data suggests trusts which back housing for the homeless or social housing.
The HOME trust, which is being launched this month by wealth manager Alvarium will target a total return of 7.5 per cent by building and funding accommodation for homeless people that is let to charities or housing associations. These bodies receive housing benefit from the Government.
This income may not be guaranteed, but default is unlikely. The same applies to the rental income stream received by the social housing trusts Civitas and Triple Point which both yield close to 5 per cent.
Since you are rethinking your ways of securing the income, you could try to have some fun along the way.
Carthew cites the Hipgnosis Songs trust (yield 4.3 per cent) which acquires rights to hits from artists like Blondie, Stormzy and Adele.
When you hear Adele’s Someone Like You on the radio, they are truly playing your song.
Popular shares – Tesco
Supermarkets have been held up as among the heroes of the pandemic – but their shares haven’t been so bold.
Demand has been boosted by more people eating at home, caused by the lockdown and a reluctance to go to pubs and restaurants even after they reopened.
But Tesco’s shares remain more than 17 per cent down on the year. Morrisons and Sainsbury’s are little better.
Step forward new boss Ken Murphy, who will have his first chance to lay out his thoughts on where the future of Britain’s biggest supermarket lies when results are published on Wednesday.
Overall Tesco has held its own in the pandemic, using its large stores and online muscle to post a 10.5 per cent sales increase in the 12 weeks to September 6.
This kept its market share stable at close to 27 per cent, halting an advance from the discounters Aldi and Lidl.
And analysts are predicting £1.4billion profits, up from £1.3billion in the year to February 2020.
But with a recession hitting, Tesco will have to make good on its promise to price-savvy customers to keep the cost of their shop down.
With Ocado and Amazon stepping up their efforts, UK grocery is about to become more competitive than ever.