Income from equities requires long-term outlook
The cuts to dividends revealed during reporting season are a reminder that generating income from equities requires a long-term outlook, according to First Sentier Investors (FSI).
Rudi Minbatiwala, FSI head of equity income, said the total amount of dividends paid out by Australian Securities Exchange (ASX) listed companies fell by 27% between FY19 and FY20, as approximately 70% of companies reduced their dividends or paid none at all.
“The companies that cut dividends weren’t exclusively the ones who suffered losses over the reporting period; some made the decision to pre-emptively shore up their balance sheets,” Minbatiwala said.
“COVID-19 has hit different industries in different ways, and reinforced the notion that returning cash to investors is only appropriate when companies have some level of comfort about the future.
“In the recently completed FY20 earnings season, we saw companies cut dividends based on a range of factors.
“While companies such as Ramsay Healthcare actually saw a drop in revenue due to elective surgery cuts, other companies, like James Hardie, performed well but made a decision to strengthen their balance sheet for the future.”
Minbatiwala said this required a different approach to equity income, as dividend yields could be volatile and didn’t tell the whole story of a company’s value.
“We take a more holistic view of the investment options available to us, considering total returns and long-term earnings growth, in addition to dividend income,” Minbatiwala said.
“This approach provides the flexibility to be invested in the right stocks, at the right time, at the right price during different market conditions.”
He also suggested using options as a strategy to provide short-term income needs for investors that needed income now.
“In our experience, a buy-write strategy delivers smoother returns through the market cycle,” Minbatiwala said.
“In addition to the two traditional streams of income generated from dividends and franking credits, options can exploit share price volatility to generate a third stream of income called option premium income.
“In a period where investors have been reminded that dividend yields are not as reliable as one might hope, we have found this diversified approach is an effective approach to providing income from equities.”
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