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Dividend Investing In The Time Of Covid: Expert Insights

Back in March, the Federal Reserve slashed interest rates about as low as they go in an effort to protect the U.S. economy from the worst of the Covid-19 crisis. With yields on savings decimated, investors could at least take comfort in reliable income from dividend-paying investments.

If only they were so lucky. The relentless coronavirus recession has caught up with dividend stocks, many of which have slashed or discontinued payouts altogether. Dividend investors are uneasy about what lies ahead.

To help you combat any of that unease, here’s everything you need to know about the impact of the coronavirus on stock dividends so far—and how you can brace your portfolio and investing strategy for any market fallout.

Recessions Decimate Dividends, That’s What They Do

During economic downturns, public companies frequently lower or eliminate dividend payments. In the Great Recession, for example, the S&P 500 saw an average dividend payout decrease of over 37% from 2008 to 2009. That was the biggest decrease in S&P 500 dividend payments since 1938.

The good news for investors is that the current Covid-19 recession will likely have less of a negative impact on dividends overall.

“From a macro level, we saw significantly more dividend cuts during the 2008 financial crisis than we have so far in this current one,” says Daniel Milan, financial advisor and managing partner of Cornerstone Financial Services.

How Has Covid-19 Impacted Dividends?

Dividends may be less affected by the current economic crisis for a couple of reasons, says Milan. The coronavirus epidemic has had a wildly divergent impact on different sectors of the economy. Real estate, travel, industrials and Main Street are hurting more than other parts of the economy, like the financial industry, he says.

According to research by Linda Zhang, senior advisor to SoFi and CEO of Purview Investments, the markets are experiencing the largest divergence in performance among different sectors in roughly two decades. Entire industries, like air travel and hotels, are grinding to a complete halt. Meanwhile, sectors like consumer staples are picking up the slack.

The outcome? Dividends paid by some of America’s most reliable stocks have been compromised while other names have actually raised their dividend payments.

Companies That Have Decreased or Eliminated Dividends During Covid-19

To help bolster balance sheets, companies across the board have slashed or stopped paying dividends completely. Here’s a sector-by-sector look at companies that have decreased or eliminated dividend payments this year.

Consumer Cyclicals

  • AMC Entertainment (AMC): Dividend cut to $0.03 per share from $0.80
  • Bloomin’ Brands (BLMN): Dividend suspended
  • Carnival (CCL): Dividend suspended
  • Darden Restaurants (DRI): Dividend suspended
  • Dick’s Sporting Goods (DKS): Dividend suspended
  • Ford (F): Dividend suspended
  • GAP (GPS): Dividend suspended
  • Goodyear (GT): Dividend suspended
  • Las Vegas Sands (LVS): Dividend suspended
  • Macy’s (M): Dividend suspended
  • Marriott (MAR): Dividend suspended
  • Nordstrom (JWN): Dividend suspended

Energy

  • Apache (APA): Annual dividend cut to $0.025 per share from $0.25
  • Schlumberger (SLB): Dividend cut to $0.125 per share from $2.00

Financials

  • Wells Fargo (WFC): dividend cut to $0.10 from $0.31 per share

Industrials

  • Boeing (BA): Dividend suspended
  • Delta Airlines (DAL): Dividend suspended

Telecommunications

  • Targa Resources (TGRP): Dividend cut to $0.40 per share from $3.64

Companies That Have Raised Dividends During Covid-19

It’s rare to see firms raising dividends this year, although there are a few exceptions, Zhang says.

“So far, the exceptions tend to be companies with better revenue prospects despite Covid-19—or even because of it. Several consumer staple and drug firms have managed to do so,” says Zhang. Here’s a sector-by-sector look at companies that have bumped up dividends this year.

Basic Materials

  • Newmont Corporation (NEM): 78.6% dividend increase, to a yield of 1.7%

Consumer Cyclicals

  • Costco (COST): 0.9% dividend increase, to a yield of 7.7%
  • Pool Corp. (POOL): 5.5% dividend increase, to a 0.9% yield

Consumer Non-Cyclicals

  • Cardinal Health (CAH): 1.0% dividend increase, to a 3.8% yield
  • Pepsi Co. (PEP): 7.1% dividend increase to a yield of 3.1%
  • Procter & Gamble (PG): 2.7% dividend increase to a 6% a yield

Health and Healthcare

  • Johnson & Johnson (JNJ): 2.9% dividend increase, to a 6.3% yield
  • Medtronic (MDT): 7.4% dividend increase to a yield of 2.6%

Industrials

  • Northrop Grumman (NOC): 9.8% dividend increase, to a 1.9% yield

Utilities

  • American Waterworks (AWK): 10% dividend increase to a yield of 1.8%

Dividend Investing Strategies for Covid-19

For income investors whose strategy relied on dividend stocks, the future may seem uncertain. It’s still possible to pursue dividend investing during the current downturn, however. You just need to be more selective.

“Covid-19 has forced investors to be much more selective in which dividend-paying stocks to invest in,” says Milan. “Current market conditions mean maintaining a blue-chip dividend portfolio with companies that still have a strong balance sheet and cash flows.”

Investors shouldn’t blindly chase dividends, though, regardless of the present economy.

“Investors shouldn’t reach for yield,” says Hank Smith, Head of Investment Strategy at The Haverford Trust Company. “Stocks with very high [dividend] yields, say 8% or higher, often are a market signal that the dividend is not safe.” In other words, if a dividend yield seems too good to be true, it just may be.

That said, stocks that pay more typical dividends tend to be less volatile overall than their non-dividend counterparts. And if a company chooses to increase its dividend? That’s probably the “the most tangible statement” it can make about its current and future finances, says Smith.

If you’re a long-term investor looking to change up the dividend stocks you hold, Smith recommends looking for companies that have historically increased their dividends over time, outside of today’s extreme market conditions.

And if you’re just starting out? Zhang suggests turning to exchange-traded funds (ETFs) focusing on dividend-paying securities across industries. ETFs provide easy diversification and have broader, potentially less volatile exposure, meaning you’ll feel less of the price changes of any single stock.

Keep an eye out for ETFs heavily invested in particular industries, though. Despite their greater diversification, these ETFs will still be vulnerable to the same trends impacting dividend payments across those industries.

The Bottom Line

Given the 2020 chaos—global pandemic, political machinations, oh my—investors will most likely earn less from dividends this year.

What can you do? Dividend investors might consider strategic shifts to blue-chip holdings with longstanding histories of stable dividend payouts to recoup some of their income mojo this year. They might also think about exploring investments in sectors that Covid-19 has bolstered, rather than stalled.

But should you pull your money out of the market and dive into the security of fixed income instead? Smith doesn’t think that’s the best solution.

“Forty years ago, in 1980, an investor could have purchased a 10-year, risk-free Treasury bond with a 15% yield,” he says. “Or an investor could have purchased a blue-chip growth company like Johnson & Johnson with a dividend yield of 3%. Today, that purchase of JNJ would have yielded over 200% because of 40 consecutive years of dividend increases.”

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