With summer and the Q2 earnings season now firmly in the rearview mirror, we felt it appropriate to revisit one headline-dominating equity investment topic of 2020: dividend cuts. In the first half of the year, we discussed the timing and magnitude of dividend cuts and suspensions. Our data-driven analysis disagreed with some of the conclusions put forth by financial media. The limited scope of the reductions that took place had minor aggregate impact on the diversified investor, amounting to an estimated two quarters of dividend growth wiped out.
Recent developments further the narrative that the worst of this year’s dividend cuts may be behind us. Economic conditions are improving as companies return to some level of normalcy, and consumers are resuming at least some of their historical spending patterns. Let’s take a look at what that could mean for the future.
How should income investors think about current dividend yields?
The change in yield levels over the periods analyzed in the table below tells a twofold story of dramatic price swings and far more reserved dividend declines. Our first point of reference is the change in indicated yield from 12/31/19 to 5/31/20. Notice that the two numbers are nearly identical for the S&P 500®. We also know the price of the index fell 5% over that span. Intuitively that means dividends fell by a similar percentage, resulting in the flat yield number.
Regular and indicated index yields updated to 8/31/2020
Sources: Bloomberg, FactSet, Parametric, 8/31/2020. For illustrative purposes only. It is not possible to invest directly in an index.
Juxtapose those outcomes with those in the period from 5/31/20 to 8/31/20, and the narrative changes. On its face it would seem cuts increased during that time frame due to the falling yield level. Because the S&P 500® rose more than 15% during that window, the resulting indicated yield would have fallen to 1.64% from price appreciation alone. That left just four basis points of cut impact realized over the summer.
S&P Global, the parent company of the S&P 500®, has provided further comments about the scope of this year’s cuts. The firm’s analysts halved their 2020 dividend payout cut estimates from -4% in May to -2% in August. Estimated dividend growth from the majority of index constituents that did not cut payouts provides ballast to aggregate yield numbers—an essential factor when looking toward the year’s end.
Frequency of announced 2020 dividend cut by index and month
Sources: FactSet, Parametric, 8/31/2020. For illustrative purposes only. It is not possible to invest directly in an index.
The cadence of dividend cuts gives us a glimpse of what the future may hold. The chart above indicates that the pace of cuts not only decelerated from its April peak but has all but stopped. This trend bodes well for the income-oriented investor: Following the rash of cuts that started back in March and did not reach full realization until summer, index-level dividend payments should begin to rise in the latter half of the year. Absent any shocks that induce excess market volatility in the coming months, sentiment should remain generally positive, share prices should retain upward momentum, and dividend payouts should return to growth.