Cancelled Dividends

[Alaric]

There's a thread notionally about a house builder which has developed into a discussion of wider issues.
viewtopic.php?f=15&t=23982

Faced with cancelled dividends, what should an investor looking for drawdown income do?

Options would seem to include doing nothing, sitting on cash waiting for more normal circumstances to return.
Otherwise shares with cancelled dividends could be ruled out entirely, or should they be bought anyway as a speculation on recovery?
Buying ITs or overseas shares is also an option.

Mix and match is no doubt possible, necessary even if the investor both needed the drawdown income and was inclined to speculate. Hold cash to meet the assumed temporary dividend shortfall

ETFs and other tracker funds are only going to deliver what the market produces, a prediction of which doesn't have the usual certainties that last year's dividends will be repeated this year.

[Dod101]

Somewhere in the last day or two I posted a list of my income shares. Out of 21 of them I have had only one outright cancellation (HSBC) and three cuts (Imperial Brands, Shell and Admiral) None of these three was directly related to Covid 19. This I think will probably result in a reduction in the actual dividends received by me of around 10/15% for this calendar year. Thus I will do nothing.

I am not sure that I would be buying the likes of an income IT unless it was maybe HFEL, depending on your view of how long the dividends will take to be reinstated. ITs like City of London and Edinburgh and probably also Temple Bar are facing just the same problems as anyone else holding UK income shares except that they will most likely draw on their income reserves but in essence that is no different from any of us doing the same from our own reserves; at some point they will dry up and a cut will be inevitable if the dividends are not quickly reinstated unless, that is, either party decides to start selling capital reserves. So I do not think that buying an IT simply to protect against dividend cuts is any answer.

If cuts are really biting then a reappraisal of the entire portfolio seems to me to be sensible and maybe settling for lower but more dependable yields might be one way to go and/or move to a more international portfolio. I think one key is to be flexible and not be bound to one strategy.

Dod

[dealtn]

There is a well known "rules based" system that followers have been able to follow for many years.

An unusual set of events has occurred such that it is no longer possible to follow the rules. So what is to be done?

Abandon the system? Allow the rules to be changed (perhaps justifying it as only temporary)? Carry on but pretend the rules aren't as rigid as initially thought (and over many years defended)?

Ironically a Board exists, with the word "practical" in its heading. For much of that time discussions and debates have taken place, often with emotive language around "theory" rather than "practice", and with events now taking place it is only right that "practical" matters are coming to the fore.

In practice it comes down to whether it is more important to you to "defend" the rules, or to adapt to what is being lived through. For some the former is more important than the latter, maybe they don't "need" the Income the strategy is designed to deliver. For those that do "need" an income they have no choice to adapt (justifying it as temporary, or abandoning it permanently).

Turning to your question "What should an investor looking for drawdown income do?" I think a distinction needs to be made between those looking for a drawdown income (now or in the future) and those "needing" a drawdown income (and now!). In the case of the latter then either borrowing or selling capital is required. In the former I think consideration needs to be given to the reality that rules based systems are only as good as the rules, and the economic environment they are lived through. If the current period was considered impossible, or unlikely, at inception, and experience has shown that assumption to be false, then adapting and diversifying away from over-reliance on that rules based strategy is inevitable and logical.

[Arborbridge]

Ironically a Board exists, with the word "practical" in its heading. For much of that time discussions and debates have taken place, often with emotive language around "theory" rather than "practice", and with events now taking place it is only right that "practical" matters are coming to the fore.

In practice it comes down to whether it is more important to you to "defend" the rules, or to adapt to what is being lived through. For some the former is more important than the latter, maybe they don't "need" the Income the strategy is designed to deliver. For those that do "need" an income they have no choice to adapt (justifying it as temporary, or abandoning it permanently).

I hope that majority of my posts on HYP-P have been largely practical over the years, but I guess that's up to others to judge
Long ago - in fact from the first moment of HYPing - I knew this sort of time would come. It wasn't unexpected because we have had periods of cancellations before. In fact this is not yet as serious as the previous one, though it may well become so. I built my HYP and reserves around the possibility of a 50% drop in income and 5-7 years to recuperate, and decided that as this sort of event is within the bounds of "normal" I would not attempt to sell out and reconstruct my portfolio later.

That's where I am at the moment- just working through what is a normal event without - as I see it - the need to change tack. To continue the sailing metaphor - I hope not to run aground contiuing on this tack!

Arb.

[tjh290633]

When we had the 2008 hiatus, many companies stopped paying dividends because they had no other option. This time it is different, with many companies stopping dividends, at the behest of the FSA, or as a precaution to conserve cash during what is inevitably a difficult time. Not all will emerge unscathed, but many will and my view is that, after the event, one must make a judgement as to whether the temporary pause in dividends should be disregarded or forever held against them.

I can think of 3 shares which I held at that time, Rexam, Segro and William Hill, all of whom had rights issues and decided to cancel one dividend to be paid about the time of the rights issue, to avoid having to raise even more cash. My view was that those cancellations should be ignored. Others have considered that those were heinous crimes, to be forever held on the record and the company to be labelled as a rotten cutter. I do not share that view.

I am not topping up any share which has cancelled its dividends, but I look favourably on those who have rebased their dividends, like PSON, RDSB, IMB and SSE for example. I will pass judgement on others when hostilities have ceased.

TJH

[CryptoPlankton]

There is a well known "rules based" system that followers have been able to follow for many years.

An unusual set of events has occurred such that it is no longer possible to follow the rules. So what is to be done?

Abandon the system? Allow the rules to be changed (perhaps justifying it as only temporary)? Carry on but pretend the rules aren't as rigid as initially thought (and over many years defended)?

Ironically a Board exists, with the word "practical" in its heading. For much of that time discussions and debates have taken place, often with emotive language around "theory" rather than "practice", and with events now taking place it is only right that "practical" matters are coming to the fore.

In practice it comes down to whether it is more important to you to "defend" the rules, or to adapt to what is being lived through. For some the former is more important than the latter, maybe they don't "need" the Income the strategy is designed to deliver. For those that do "need" an income they have no choice to adapt (justifying it as temporary, or abandoning it permanently).

Turning to your question "What should an investor looking for drawdown income do?" I think a distinction needs to be made between those looking for a drawdown income (now or in the future) and those "needing" a drawdown income (and now!). In the case of the latter then either borrowing or selling capital is required. In the former I think consideration needs to be given to the reality that rules based systems are only as good as the rules, and the economic environment they are lived through. If the current period was considered impossible, or unlikely, at inception, and experience has shown that assumption to be false, then adapting and diversifying away from over-reliance on that rules based strategy is inevitable and logical.

The UK economy is a "rules based" system and similar questions have had to be addressed across the land from the Treasury down to individuals dealing with their own personal finances. The people running the "well known" system to which you refer, have their own issues to deal with, but so do many people/businesses/governments. While it's fine for other people to have their opinions, it's normal for people/institutions to decide for themselves whether to find their own answers "in house" or go further afield to discuss their options.

It's encouraging to see this thread, and the one on the other board to which the OP refers, providing some evidence that the new guidelines may be a significant improvement. Much better to DYOR on double glazing than to endure the hard sell on your doorstep!

(Sorry to go OT, but it's good to see the possibility of a better atmosphere developing. And, on that note, a huge apology to all for my part in an unsavoury spat on another thread on this board - spawned by extreme tiredness, but still unforgivable...)

[Wizard]

The thing that is running through my mind is the extent to which the Covid-19 situation is being used by some companies to tackle a level of dividend payments that had rather run away from the respective boards. At the outset I predicted a lot of companies would use Covid-19 as 'cover' for dividend cuts that they wanted to make anyway. If that is correct then that must have an impact on the recovery process. If a company was happy paying a dividend of X, but due to Covid-19 took a prudent view and cut it to 50% of X, they may well return to X or X+ fairly quickly. However, if the company was only paying X because it did not want to be seen to cut the dividend in 'normal times' the rate of increase from 50% of X will presumably be much slower.

My understanding is that relative to other markets the UK market was paying a very high level of dividends. My personal view is that Covi-19 will have presented an opportunity for the UK market in aggregate to reduce that gap. I am therefore bearish on the prospects for a rapid return to the pre-Covid-19 position.

If I were living off my dividend income and I was not currently diversified beyond the UK I would be looking to create such diversification as a priority. The problem is that those shares that have reduced or cancelled their dividends are some of the ones hit hard in terms of capital value, well at least that is the case in my legacy income portfolio. Any restructuring would be an expensive exercise in terms of income against what the investor may have been used to.

For example, an income investor may decide to switch from Lloyds to Bank of Montreal to switch from a non-payer to a payer and at the same time get more geographical diversification. As of 1st January if they had sold 10,000 Lloyds shares on 1st January they could have bought approximately 107, selling those 10,000 shares on 20th February would have allowed them to buy roughly 95 Bank of Montreal shares, but today they could only buy about 72 Bank of Montreal shares. The exchange rate has hardly moved, but the Lloyds share price is down a lot more than the Bank of Montreal price. In the last year those Lloyds shares would have given them a dividend of £226, the next twelve months may well result in no income. Taking account of the 15% withholding tax for a Canadian share in a SIPP the Bank of Montreal shares will likely give them a dividend of about £151, a roughly one third reduction to the income they used to enjoy (had they made the switch in January it would have been about £225).

[moorfield]

The thing that is running through my mind is the extent to which the Covid-19 situation is being used by some companies to tackle a level of dividend payments that had rather run away from the respective boards. At the outset I predicted a lot of companies would use Covid-19 as 'cover' for dividend cuts that they wanted to make anyway.

The thing that is running through my mind is the extent to which the Covid-19 situation is being used by some companies to tackle a level of dividend payments that had rather run away from the respective boards. At the outset I predicted a lot of companies would use Covid-19 as 'cover' for rights issues that they wanted to make anyway.

Remember you read that here first. And William Hill have been first out of the starting gate (appropriately!) already.

[Arborbridge]

The thing that is running through my mind is the extent to which the Covid-19 situation is being used by some companies to tackle a level of dividend payments that had rather run away from the respective boards. At the outset I predicted a lot of companies would use Covid-19 as 'cover' for dividend cuts that they wanted to make anyway. If that is correct then that must have an impact on the recovery process. If a company was happy paying a dividend of X, but due to Covid-19 took a prudent view and cut it to 50% of X, they may well return to X or X+ fairly quickly. However, if the company was only paying X because it did not want to be seen to cut the dividend in 'normal times' the rate of increase from 50% of X will presumably be much slower.

My understanding is that relative to other markets the UK market was paying a very high level of dividends. My personal view is that Covi-19 will have presented an opportunity for the UK market in aggregate to reduce that gap. I am therefore bearish on the prospects for a rapid return to the pre-Covid-19 position.

My observation is that the UK market has been demanding higher yields than other markets for many decades. Quite why that is, I'm not sure, but it has always seemed the dynamic here, whereas markets seem to value businesses which re-invest in themselves thus keeping yields lower. Since that has been the case for so long, it will be interesting know why, and what would make the market or companies wish to "close the gap" or indeed, why it didn't happen in all the decades previously.

Well, may be there will be a big "second thoughts" about paying out, maybe not - only time will tell.

Wizard, BTW: have you not updated your "cancelled" thread lately, or is it just that there haven't been any cancellations for a week or so?

Arb.

[Wizard]

The thing that is running through my mind is the extent to which the Covid-19 situation is being used by some companies to tackle a level of dividend payments that had rather run away from the respective boards. At the outset I predicted a lot of companies would use Covid-19 as 'cover' for dividend cuts that they wanted to make anyway. If that is correct then that must have an impact on the recovery process. If a company was happy paying a dividend of X, but due to Covid-19 took a prudent view and cut it to 50% of X, they may well return to X or X+ fairly quickly. However, if the company was only paying X because it did not want to be seen to cut the dividend in 'normal times' the rate of increase from 50% of X will presumably be much slower.

My understanding is that relative to other markets the UK market was paying a very high level of dividends. My personal view is that Covi-19 will have presented an opportunity for the UK market in aggregate to reduce that gap. I am therefore bearish on the prospects for a rapid return to the pre-Covid-19 position.

My observation is that the UK market has been demanding higher yields than other markets for many decades. Quite why that is, I'm not sure, but it has always seemed the dynamic here, whereas markets seem to value businesses which re-invest in themselves thus keeping yields lower. Since that has been the case for so long, it will be interesting know why, and what would make the market or companies wish to "close the gap" or indeed, why it didn't happen in all the decades previously.

Well, may be there will be a big "second thoughts" about paying out, maybe not - only time will tell.

Wizard, BTW: have you not updated your "cancelled" thread lately, or is it just that there haven't been any cancellations for a week or so?

Arb.

I did double check against DividendData.com's list and since Babcock they also showed no FTSE350 cuts or cancellations. I guess all those who wanted to get it out there while Covid-19 was the story have done so. Now I think it will be down to what impact the economic destruction of the actions to combat Covid-19 have on actual results.

[Dod101]

The half year results to 30 June will only show half the story I suppose we could say, since the lockdown only started on 23 March although of course it was well underway in some parts of the world by then. Still it should give us some idea of those companies which are relatively unaffected and able to at least maintain their dividend.

Dod

[kempiejon]

My observation is that the UK market has been demanding higher yields than other markets for many decades. Quite why that is, I'm not sure, but it has always seemed the dynamic here, whereas markets seem to value businesses which re-invest in themselves thus keeping yields lower. Since that has been the case for so long, it will be interesting know why, and what would make the market or companies wish to "close the gap" or indeed, why it didn't happen in all the decades previously.

I have heard it said elsewhere that other regions pay less dividends because of the tax treatment of dividends in those other regions. USA companies for example do not pay dividends or certainly not so much as UK Co's. I have also noticed that US share prices are often 100s or 1000s of dollars. UK shares are priced in pence, is that because of the difference between decades of paying dividends in the UK and of retained earnings in USA. Also until more recently didn't the UK have favourable tax treatment of dividends. I've not looked at corporate holdings and perhaps private investors are a trivial consideration but the move in the UK on tax free dividend allowance has changed my attitude to holdings, I want low/no yield companies outside my tax shelters but I spent a decade or more to build my HYP much of it unsheltered, it's taken me a few years to move my unsheltered dividend payers and in the meantime I've had a couple of tax bills.

[Lootman]

I have heard it said elsewhere that other regions pay less dividends because of the tax treatment of dividends in those other regions. USA companies for example do not pay dividends or certainly not so much as UK Co's. I have also noticed that US share prices are often 100s or 1000s of dollars. UK shares are priced in pence, is that because of the difference between decades of paying dividends in the UK and of retained earnings in USA. Also until more recently didn't the UK have favourable tax treatment of dividends. I've not looked at corporate holdings and perhaps private investors are a trivial consideration but the move in the UK on tax free dividend allowance has changed my attitude to holdings, I want low/no yield companies outside my tax shelters but I spent a decade or more to build my HYP much of it unsheltered, it's taken me a few years to move my unsheltered dividend payers and in the meantime I've had a couple of tax bills.

I often see the argument made that US companies pay out lower dividends because of the way dividends are taxed in the US, at least relative to capital gains. That certainly used to be the case back when dividends were taxed at your marginal rate of income tax. But the Bush Junior tax cuts in the early 2000's reduced the tax rate on dividends to 15% - the same as the capital gains tax rate. So there is no tax reason to favour gains over dividends any more in the US. This is for federal taxes. State taxes are another matter. For instance California taxes capital gains as ordinary income. Some states tax neither, and so on.

However there is an element of double taxation on US dividends, since there are also corporate taxes which are on profits before dividends. Corporate bond interest does not suffer from this and so has a more favourable tax treatment.

Capital gains tax can be deferred, and their cost basis is uplifted at death, as in the UK. Whereas dividends create a tax event.

All that said I think the difference is more cultural. America is growthier and always has been. Americans cherish their growth businesses and culture. The preference for jam tomorrow over jam today can be seen in the context of the American Dream and the idea that America's economic dominance is structural and enduring. So there are few complaints about Amazon, Facebook, Netflix, Google, Tesla and Berkshire paying no dividends.

Regarding the high nominal share prices in the US, it's interesting because in a sense it doesn't matter what the price is. Splits or reverse splits can be conducted to create any level of share price. It's really a throwback to the era of fixed commissions, when a "penny stock" would be expensive to trade. And even now there are some rules based on the nominal share value e.g. margin is lower for shares with a price of less than $5, which affected even some large banks in 2008.

That probably also explains why options contracts are for 100 shares in the US whereas they are for 1,000 shares in the UK.

[OwenSwansea]

The pesky Dividend Tax should not apply to dividends paid by PLCs. It is disgraceful that a Tory Government has imposed this tax on pensioners who are standard rate taxpayers. It should only have applied to Private Limited Company’s who were using dividends to avoid paying National Insurance.
Double Taxation is not something one would expect from a Conservative Government. Very disappointing!

Owen.

[Dod101]

Hold on. Isn't there something called a stocks and shares ISA which allows us to hold shares in a totally tax free environment? £20,000 each tax year can be transferred into an ISA. That is a pretty big tax break and in any case the thread is about cancelled dividends so dividend tax will not apply.

Dod

[OwenSwansea]

A Stocks and Shares ISA is not much use to someone who has, for example, recently sold a business, and has say £500K to invest. It would take twenty five years to get this sort of money into the Stock Markets.

Owen

[Arborbridge]

A Stocks and Shares ISA is not much use to someone who has, for example, recently sold a business, and has say £500K to invest. It would take twenty five years to get this sort of money into the Stock Markets.

Owen

As Dod said, there are some pretty generous tax breaks you can use and if you have to pay income tax on the dividends you get paid why grumble? It's a sign of your success that you are in that fortunate position.

We all have to do our bit and it should be in proprtion to our means.
Your's is a lucky problem to have, as is any resulting eventual CGT liability. Many people would envy you, so suck it up and pay up.

Arb.

[Dod101]

A Stocks and Shares ISA is not much use to someone who has, for example, recently sold a business, and has say £500K to invest. It would take twenty five years to get this sort of money into the Stock Markets.

Owen

That is true but if he has a wife it would only take 12 1/2 years and there are other tax breaks as well.

Dod

[xeny]

My understanding is that relative to other markets the UK market was paying a very high level of dividends.

<SNIP>

If I were living off my dividend income and I was not currently diversified beyond the UK I would be looking to create such diversification as a priority.

Combining these two statements(both of which I agree with) presents a further possible but unpalatable conclusion.

If the UK market was paying a high level of dividends, then even after the cuts it may still be paying a higher yield than markets beyond the UK that one might diversify into.

[OwenSwansea]

Arborbridge,
Don’t you think that double taxation is wrong in principle?

Owen.