Disappearing Dividends During the Year of COVID-19

Many investors view dividend payouts as a reliable source of income, and construct portfolios emphasizing stocks that pay above-average dividends. This strategy has become common among many conservative investors over the past decade as bank interest rates and returns on government bonds have progressively approached zero.

Greatly reduced bond and bank returns has made a formerly common bond-only approach impractical among risk-adverse investors for achieving their essential retirement income goals. Since high-dividend stocks were often companies issuing bonds familiar to risk-adverse investors, a high dividend stock approach quickly captured much interest among retirees highly dependent on their portfolios for income. Over time, investors bid up the prices of those stocks as the broader market rose, effectively reducing the level of return relative to share prices, causing disappointment among retirees coming in later and wanting to increase their positions.

But it gets worse. Bonds have promised payouts; dividends for stocks are not guaranteed. So retirees expecting a regular flow of income from dividends from their stocks were surprised to see reduced or suspended dividend payouts following the coronavirus pandemic onset. Both market declines and volatility were extraordinary and selling stocks with declining dividends was not an option. Research and historical data show that changes in dividend policy by firms are common, especially during times of higher business uncertainty when cash on hand must be retained for survival.

Aggregate dividend payouts fell meaningfully in the first three quarters of 2020 compared to the same period in 2019. Exhibit 1 shows the dividends earned from a hypothetical $1 million investment in US, developed ex-US, and emerging markets in both periods. Developed ex-US markets showed the most drastic change with a 41% decrease. Dividend payments in emerging markets decreased by 29% and in US markets by 22%.

Exhibit 1: Drop Zone
Dividends from a Hypothetical $1 Million Investment

Graphic, Exhibit 1 - Drop Zone - Disappearing Dividends During the Year of COVID-19 - View From the Hill, Dec. 2020

Source: Calculated by Dimensional Fund Advisors LP from Bloomberg data. In USD. Each hypothetical investment includes all securities in the investable equity universe in the applicable region at free-float market cap weight as determined at the beginning of each year. To be included in the investable equity universe, securities must meet certain minimum capitalization and liquidity requirements. Investment companies are excluded. Past performance, including hypothetical performance, is no guarantee of future results.

Worldwide, large established firms have historically had the highest propensity to offer substantial dividend payouts.1 But even successful, well-established firms were not immune to the economic consequences of governmental response to a global pandemic. A few examples will illustrate. Harley Davidson (HOG) has been paying dividends to shareholders since the 1990s. In April 2020, the motorcycle manufacturer slashed its dividend from $0.38 per share to just $0.02, a 95% decrease.2 Gap Inc. (GPS) suspended its dividend payments until at least April 20213 after the economic downturn left the clothing brand with particularly poor revenues.

Exhibit 2: Changing Tune
Dividend Policy Changes in Global Markets (% of Dividend-Paying Firms), 2020

Graphic, Exhibit 2 - Changing Tune - Drop Zone - Disappearing Dividends During the Year of COVID-19 - View From the Hill, Dec. 2020

Source: Calculated by Dimensional Fund Advisors LP from Bloomberg data. Dividend-paying firms include all firms that have paid a dividend in the preceding 12 months and were expected to pay a dividend in the current quarter. In USD.

Harley Davidson and Gap were not the only firms to change their dividend policies. As shown in Exhibit 2, 38% of firms in global markets (2,584 companies) that were expected to pay dividends consistent with their payout history, instead decreased, omitted, or eliminated their dividend payments in the second quarter, more than doubling the 1,248 firms that made similar changes to their dividend policy in the first quarter of the year. The trend continued into the third quarter: 2,699 firms made such changes.

While these dividend cuts may come as a surprise to some retirees, history buffs may recall that, in 2009, Harley Davidson announced it was cutting dividend payouts from $0.33 per share to $0.10, a 70% decrease.4 In fact, during the Great Recession years, significant changes to firms’ dividend policies spiked throughout the global markets.

Exhibit 3 displays Fama/French global market returns for 1991–2019 with a one-year lag and the proportion of dividend-paying firms that eliminated or decreased their dividend payouts. In 2008, for example, the global market was down more than 40%, and, the following year, many firms made changes to their dividend policies. The historical correlation between global market returns and dividends that are decreased or eliminated suggest that firms are likely to alter their dividend payouts during times of market instability. Intuitively this makes sense.

Exhibit 3: In Step
Global Market Returns and Dividend Changes

Graphic, Exhibit 3 - In Step - Disappearing Dividends During the Year of COVID-19 - View From the Hill, Dec. 2020

Note: Global Market return is free-float market cap weighted average of Fama/French Developed Markets and Emerging Markets Indexes. See Index Descriptions in the disclosures for descriptions of Fama/French index data.
Source: Calculated by Dimensional Fund Advisors LP from Bloomberg data. Past performance is no guarantee of future results. Dividend paying firms include all firms that paid a dividend in the prior calendar year.

The first three quarters of 2020 remind us once again that past performance is never guaranteed. Dividend payouts can be inconsistent, particularly during times of uncertainty. Hence, investment strategies that focus on income derived from dividends may not well serve those who need a steady income stream during retirement. Moreover, that approach is unlikely be an effective way to confidently pursue long-term wealth growth.

We believe a more reliable planning approach for greater confidence of success during retirement, in addition to other planning strategies, is to structure a portfolio asset allocation strategy around stock’s fundamental characteristics that decades of economic research has demonstrated drive higher expected returns: size, relative price, and profitability, while maintaining broad diversification across names, sectors, and countries plus carefully controlling costs and taxes. A sensible, systematic process solidly grounded in an informed economic philosophy is much more likely to provide retirees a successful financial experience and greater peace of mind.

Disclosures: Index Descriptions: Fama/French Developed Markets Index: July 1990–present: Courtesy of Fama/French from Bloomberg securities data. Companies weighted by market cap; rebalanced annually in June.

Fama/French Emerging Markets Index: July 1989–present: Courtesy of Fama/French from Bloomberg and IFC securities data. Companies weighted by float-adjusted market cap; rebalanced annually in June.