Looking forward

[G3lc]

Now with interest rates being higher than they have been, how important to ongoing dividends will ongoing high interest rates be, in other words will some companies with high unfixed borrowings, choose/or have to reduce dividends, to pay higher borrowing costs, that look to be higher for longer.
So will this change the way we look at some established dividend payers?
Plus, as been said previously we have other inflation and future taxation to consider when we rely on our HYP to survive, as I do.

[Itsallaguess]

Now with interest rates being higher than they have been, how important to ongoing dividends will ongoing high interest rates be, in other words will some companies with high unfixed borrowings, choose/or have to reduce dividends, to pay higher borrowing costs, that look to be higher for longer.

So will this change the way we look at some established dividend payers?

Plus, as been said previously we have other inflation and future taxation to consider when we rely on our HYP to survive, as I do.

I think it's fairly clear that we're in a period of inflationary-cost and price-transition that might last for a while, and to some extent that's almost got to put pressure of some sort or other on virtually every single dividend-paying company, both whilst the initial 'bow-wave' impact of the shift away from years of free-money and low-inflation, into a world where higher interest-rates and higher inflation figures now work through the system, and then also over the longer-term whilst some level of working-equilibrium is hopefully then re-discovered and maintained into what we can only hope to be a sense of a 'new normal' at some point in the future.

To try and quantify all that is going to be very difficult, and the current problems are likely to affect some industries and sectors differently and over different time-scales, but as an income investor what I would say is that if there's one single benefit to be gleaned from the recent COVID-years, it's that we've seen first hand just how dynamic and resilient dividend-paying companies can be, and importantly, we've seen how quickly things can bounce back in terms of dividends, even where large swathes of those companies come under really quite severe dividend-related pressure for a number of years.

If it's safe to assume that broadly, large-companies are likely to be long-term survivors of most of the large obstacles that get in their way in a capitalist society, and if it's safe to assume that quite often during these times of high-stress, they can even sometimes come out of the other side in a comparably stronger position than when they entered, given that such periods of stress often more critically affect smaller businesses in their associated sectors, and which can sometimes therefore even offer up timely 'opportunities' for those larger companies, then on a long-term view and regarding broadly diversified income-portfolios, the transitory nature of these issues just needs to be coped with, which again is no different to the recent COVID-related period.

With the above said though, discussing potential resilience in dividend-paying companies, I have to also say that I'm a great believer in making sure that there's robust and adequate resilience in my own income-processes as well, and so there's probably no better time for us as individual income-investors to go through our own resilience-checklist and make sure that we're not *only* ever relying on any potential for company-side resilience, and that we've also got strong and adequate margin in our own financial situation to help cope with what might well be another period of income-related pressure ahead of us...

For me, that would mean adequate personal margin in the following important areas -

• Income-reserve, ensuring that incoming-dividends go into a 'pot' to be paid-out later on, and where that 'pot' contains a number of years-worth of required spending

• Income-margin, ensuring that expected incoming dividends over the coming year are over and above, with a useful level of margin available, my expected yearly expenditure

Being concerned about the resilience of dividend-paying companies is absolutely the right way to look at things, and during these periods of system-stress we're all bound to have larger concerns than normal, but that means it's more important than ever to make sure that such company-level resilience isn't the only coping-mechanism we might have to rely on, and it's within our gift as income-investors to try and come up with some additional layers of income-resilience that are both much simpler to quantify, and also much easier to control...

Cheers,

Itsallaguess

[G3lc]

Thank you for your thoughtful response, to an extent it would seem to be as your name.

I have some faith in property companies that are still with us in some years going forward. Bought a bit of TW today it has cash to hopefully continue paying the dividend, at less than the perhaps asset value.

Having said that what else is there in these odd times? - also it helps to keep one’s mind active.

[Charlottesquare]

I cannot imagine too many listed companies with significant debt not having in place hedging for interest payable, it would in my view be somewhat negligent if they did not. Careful reading of their last accounts within the notes for interest payable and creditors within one year and over one year should give some indications as to their debt management.

[Itsallaguess]

I have some faith in property companies that are still with us in some years going forward. Bought a bit of TW today it has cash to hopefully continue paying the dividend, at less than the perhaps asset value.

Having said that what else is there in these odd times? - also it helps to keep one’s mind active.

One aspect worth considering if you're looking for fresh income-investments with these types of concerns in mind might be to look at some of the sectors that have already been negatively affected by the recent interest-rate rises.

Below are AIC links looking at yield-ranked options in both the Renewable Energy Infrastructure sector and the UK Commercial Property (REIT) sector -

Renewable Energy Infrastructure - https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=REI&sortid=NetDivYld&desc=true

UK Commercial Property - https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=PUC&sortid=NetDivYld&desc=true

I should add that currently I've no income-investments in either sector myself, so I only mention the above in respect of your specific concerns in your opening post, because at least to some extent we might consider some of the related damage that you might be concerned about to already be built into some of those relatively poor 1-year performance figures, and so if you think things may improve from here or at any point in the future, then an entry point into sectors that have already paid some level of performance-related cost due to these types of issues might be something to perhaps consider...

Cheers,

Itsallaguess

[scrumpyjack]

If you want dividend sustainability through the cycle, there is a lot to be said for Investment Trusts. They are able to retain up to 15% of their income to build up reserves so that their dividend payout can be maintained even when their incoming dividend income reduces.

[csearle]

Now with interest rates being higher than they have been, how important to ongoing dividends will ongoing high interest rates be, in other words will some companies with high unfixed borrowings, choose/or have to reduce dividends, to pay higher borrowing costs, that look to be higher for longer.

So will this change the way we look at some established dividend payers?

Plus, as been said previously we have other inflation and future taxation to consider when we rely on our HYP to survive, as I do.

I think it's fairly clear that...

Excellent response. C.

[funduffer]

I have some faith in property companies that are still with us in some years going forward. Bought a bit of TW today it has cash to hopefully continue paying the dividend, at less than the perhaps asset value.

Having said that what else is there in these odd times? - also it helps to keep one’s mind active.

One aspect worth considering if you're looking for fresh income-investments with these types of concerns in mind might be to look at some of the sectors that have already been negatively affected by the recent interest-rate rises.

Below are AIC links looking at yield-ranked options in both the Renewable Energy Infrastructure sector and the UK Commercial Property (REIT) sector -

Renewable Energy Infrastructure - https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=REI&sortid=NetDivYld&desc=true

UK Commercial Property - https://www.theaic.co.uk/aic/find-compare-investment-companies?sec=PUC&sortid=NetDivYld&desc=true

I should add that currently I've no income-investments in either sector myself, so I only mention the above in respect of your specific concerns in your opening post, because at least to some extent we might consider some of the related damage that you might be concerned about to already be built into some of those relatively poor 1-year performance figures, and so if you think things may improve from here or at any point in the future, then an entry point into sectors that have already paid some level of performance-related cost due to these types of issues might be something to perhaps consider...

Cheers,

Itsallaguess

Quite so. Just look at those discounts! Extraordinary!

[Itsallaguess]

I have some faith in property companies that are still with us in some years going forward.

Bought a bit of TW today it has cash to hopefully continue paying the dividend, at less than the perhaps asset value.

Surely housebuilders are in the middle of a perfect storm right now, and there's likely to be more opportune times to add to that sector?

Much higher building material prices, higher labour prices along with a situation where labour-hiring and retention is a big struggle, and then on top of all that, interest-rate rises affecting potential end-purchasers - I think I'd prefer sitting in cash than getting into housebuilders right now, and we've only got to look at the trading update from Crest Nicholson this morning to see how all that's negatively affecting the sector -

[Crest Nicholson] Trading Update -

Against a backdrop of persistently high inflation and rising interest rates, trading conditions for the housing market have worsened during the summer of this year. While pricing has remained resilient in a market with limited supply and few distressed sellers, the economic uncertainty is deterring prospective home movers. Additional mortgage borrowing for those looking to upgrade or for those with low levels of equity, notably first-time buyers, has become significantly more expensive with no Government support (following the end of Help to Buy) now in place to cushion this impact.

Transaction levels across the industry have therefore weakened further, particularly in recent weeks. Although overall inflation is encouragingly starting to fall, core inflation and wage inflation both remain high with further interest rate rises forecast over the coming months. The Group does not therefore expect to see a material improvement in trading conditions before its year end at 31 October 2023.

At the interim results in June 2023 the Group outlined that it was forecasting a SPOW rate of 0.50 for the second half and for the 7 weeks to 18 August 2023 this has been 0.25, representing a progressively deteriorating trend.

Given this market backdrop the Group is also currently negotiating several bulk deals on appropriate commercial terms with partners where it has developed strong relationships over recent years. These transactions will provide support to volume delivery in future years.

https://www.investegate.co.uk/announcement/rns/crest-nicholson-holdings--crst/trading-update/7706696

Crest Nicholson shares are down 13% this morning, and most UK listed housebuilders seem to be under similar price-related pressure...

https://www.google.com/finance/quote/CRST:LON?comparison=LON%3APSN%2CLON%3ATW

Cheers,

Itsallaguess

[vand]

Now with interest rates being higher than they have been, how important to ongoing dividends will ongoing high interest rates be, in other words will some companies with high unfixed borrowings, choose/or have to reduce dividends, to pay higher borrowing costs, that look to be higher for longer.
So will this change the way we look at some established dividend payers?
Plus, as been said previously we have other inflation and future taxation to consider when we rely on our HYP to survive, as I do.

Probably, yes.

Cost of capital is a real business variable and has to be taken into consideration when making capital allocation decisions.

companies can only do 5 things with their money:

pay out dividends
buy their own stock
reinvest into the business for future growth
pay off debt
buy another company


Paying off debt becomes more attractive if the risk free return of doing so is higher.

[G3lc]

When I originally bought PSN in 2008 it’s share price was £4.88, no regrets, it owes me nothing.

[Itsallaguess]

When I originally bought PSN in 2008 it’s share price was £4.88, no regrets, it owes me nothing.

But the thread-title is 'Looking forward', not 'Looking backwards'...

Cheers,

Itsallaguess

[G3lc]

It was my response to previous emails comment about a certain stock now looking like a bad move but thinking of the future as I did at the time, the future may look very different from today - its all a guess.

[Itsallaguess]

It was my response to previous emails comment about a certain stock now looking like a bad move but thinking of the future as I did at the time, the future may look very different from today.

I'll admit to being a little confused to see someone raising a couple of threads with what I agree to be valid concerns regarding the current economic outlook, and then at the same time be seen to be buying a house-builder where almost all of the concerns being raised are currently, and for the near and possibly medium-term too, causing problems for many in the same sector, as clearly demonstrated by this morning's RNS release from Crest Nicholson, and covered by Taylor Wimpey themselves in their recent half-year results on 2nd of August...

To be clear - if you'd have originally been asking for ideas for companies that are currently being heavily affected by the current economic woes, then I wouldn't be confused, because it might be seen as a contrarian play perhaps, but to ask the original questions that seemed to be looking for robust ideas in the current climate, and then buy something that is currently being affected by your concerns just feels a little confusing, sorry.

Cheers,

Itsallaguess

[G3lc]

Sorry about the confusion but I thought you may have thought the situation at TW with no debt, money in the bank, a capital value land bank, still paying a good dividend may be the sort of values that many companies lack and may be the sort of thing one takes in to consideration when looking to invest in for the future, ignoring the bad news news today, but of course I could be wrong, but if one does nothing in case one makes a mistake, you know how that one goes.

[daveh]

Sorry about the confusion but I thought you may have thought the situation at TW with no debt, money in the bank, a capital value land bank, still paying a good dividend may be the sort of values that many companies lack and may be the sort of thing one takes in to consideration when looking to invest in for the future, ignoring the bad news news today, but of course I could be wrong, but if one does nothing in case one makes a mistake, you know how that one goes.

Yes it could be a good time to buy into the housebuilders, but it may get worse before it gets better so it may well be worth waiting and see if they can maintain a reasonable dividend. A lot may depend on whether we fall into recession and there are a lot of house repossessions as that will drive down the price and demand for new houses.

Sadly I already hold Vistry and Persimmon whose prices are well down from their peaks.

[Charlottesquare]

Sorry about the confusion but I thought you may have thought the situation at TW with no debt, money in the bank, a capital value land bank, still paying a good dividend may be the sort of values that many companies lack and may be the sort of thing one takes in to consideration when looking to invest in for the future, ignoring the bad news news today, but of course I could be wrong, but if one does nothing in case one makes a mistake, you know how that one goes.

Yes it could be a good time to buy into the housebuilders, but it may get worse before it gets better so it may well be worth waiting and see if they can maintain a reasonable dividend. A lot may depend on whether we fall into recession and there are a lot of house repossessions as that will drive down the price and demand for new houses.

Sadly I already hold Vistry and Persimmon whose prices are well down from their peaks.

It looks like different markets out there depending on price points. Daughter and future son in law went after a purchase last week, Edinburgh, offers over £295, they bid circa £335, apparently beaten by a bid of £345, not to me a sign of a flat market, yet I also heard yesterday that Righmove for Edinburgh had a lot more that previously fixed price properties (often a sign of a problem market here) and certainly Scottish Borders seems to be off the boil. Another story from a builder I know is he was still selling some new builds (not Edinburgh) at the £600k level. My reading is FTBs stretching may be off the boil, at say the lower £200k-£250 level, further up the food chain for those with more equity/deposit things still seem different.

Just to show how much I know about property, I hold Bellway with a 17.81% latent loss and Springfield with a 35% latent loss, doubt I will sell, suspect I will ride things out.

[csearle]

Surely housebuilders are in the middle of a perfect storm right now, and there's likely to be more opportune times to add to that sector?

Maybe I'm getting something out of context here, if so I apologise. If housebuilders are indeed in the middle of a perfect storm then wouldn't now be the most opportune time to add to their sector? I'm thinking of the contrarian viewpoint, as hopefully reflected in the dividend yield.

Chris

[Itsallaguess]

Surely housebuilders are in the middle of a perfect storm right now, and there's likely to be more opportune times to add to that sector?

Maybe I'm getting something out of context here, if so I apologise.

If housebuilders are indeed in the middle of a perfect storm then wouldn't now be the most opportune time to add to their sector? I'm thinking of the contrarian viewpoint, as hopefully reflected in the dividend yield.

I think a contrarian viewpoint is a valid one sometimes Chris, but that's certainly not what the opening post was wanting to discuss initially, and has only been introduced part-way through a thread that was initially written to be 'concerned' about high interest rates and other types of inflation...

It was that complete switch of theme part-way through the thread that was confusing, as it's difficult to take part in a discussion that then seems to be wanting to look at two diametrically opposite approaches.

Is the OP wanting to 'avoid' such risks as written in the opening post, or is he wanting to jump into something that's currently being affected by such risks in a potentially contrarian fashion, as the thread then seemed to indicate later on.

It's been difficult to tell at times...

Cheers,

Itsallaguess

[moorfield]

19 posts in I'm surprised no-one has thought to bring this back to the HYP simple basics!

Whatever happened to

Those who think they know, know even less.

The time to buy is now. Isn't it ?