As a former equity income manager, I have a liking and an admiration for companies that pay dividends. These are companies that have been able to generate profits in the form of cash and have the discipline to pay a fair share of those profits to shareholders.
In my experience, they are often the companies that do well over the long term.
During the 2008 crisis, I, like many UK income managers, suffered roughly a 30% reduction in payouts. But it was interesting that dividend culture seemed to remain. Even those companies that had cut theirs aspired to get back on the dividend list as soon as the business environment allowed.
When I first started in the investment management business, dividends were seen as a UK endeavour. However, over the past couple of decades, their popularity has grown.
In Japan, the capital discipline that accompanied Abenomics included the discipline of paying dividends. In Europe, the new shareholder focus included greater attention to payouts. Even in the US, which remains buyback central, dividends are an increasing part of the mix in returning capital to shareholders.
Of course, the current crisis has made the dividend rout of 2008/09 look somewhat tame. UK dividends look poised to halve this year, with Europe not far behind at a 45% cut.
In the US, the pain has been seen more in the absence of share buybacks. Buybacks are allied with US companies’ setting of payouts for the year ahead, so, perhaps this signals more pain to come next year? Japan’s payout will also be lower – although not to the extent of its UK and European peers.
So, where from here? It certainly seems like the culture of the dividend has taken a hit. I would be the first to argue against a dividend payout if a company cannot afford it or, indeed, if investment by the company would offer me a higher return.
But it does feel like the payout may be slipping lower down board agendas.
Related to this is the increasing – and, over the past few months, vital – role of the state in the private sector. The furlough scheme and other support mechanisms have led to the state and the people having a greater interest in the cashflows of the private sector.
There is no doubt that shareholders will be, in some sectors, a lower-ranking stakeholder than before. This is fair, given the support the state has provided to many companies – but it may change the dividend debate.
The increased prevalence of technology companies in their various forms may also affect dividends. The line of reasoning is that, if a company is paying out money to shareholders (or indeed buying back its shares), it has run out of investment ideas. This can be a strong argument in these sectors.
I believe there is room for both shareholder payouts and investment for future growth – although I may be a lone voice in Silicon Valley.
As a result, this is an important time for investors who like their dividends. Fashions may be changing. But often, if you wait long enough, fashions come back.
Richard Dunbar is head of multi-asset research at Aberdeen Standard Investments