Whenever I do my homework on dividends (which is pretty considerable as I have the Switzer Dividend Growth (SWTZ) fund), I never pressure test the possible yield during an extreme occurrence such as a pandemic and economic lock down.
To misuse the great line from the Robert Frost poem The Road Not Taken: “We took the road less travelled by and that has made all the difference!”, because of the pandemic, we’ve gone down an economic road that’s never been trod before in our lifetime. And this has led to a very different outcome for dividends, even compared to the GFC.
The difference hasn’t been positive for the very good businesses many of us invest in. We never expected these businesses would face closures for about 12 weeks and then another quarter after that, where listed companies will have to cope with stressed business and consumers trying to embrace normalcy again.
This Coronavirus crash of stock markets and the global economy (as well our own) will create cautious consumers and business investors.
Many businesses will right-size their staff to suit the recession-like environment, for at least the June and September quarters, which will smash revenue, and profits, as it has already done to stock prices.
But as the old Annie song goes the “sun will come out tomorrow, so you better hold on until tomorrow…”
And that’s what your investment approach has to be for 2020. It’s what drove Tony Featherstone to recommend the banks last week. He knows they won’t rebound terrifically in the short term as they deal with a slowing economy, deferred loans, debt defaults and bankruptcies. But they will eventually rebound as the economy does so. The RBA and the IMF have predicted around a 7% collapse of growth in 2020 but a rebound of 6% plus for 2021.
If/when that happens, bank share prices will pick up and the dividend will gradually reflect that. But you’ll have to be patient ahead of the ‘sun’ coming out for better dividends.
I wrote about whether banks are a buy in my article for Switzer Daily today: https://switzer.com.au/the-experts/peter-switzer/is-it-time-to-buy-bank-shares-2/
Let’s look at the CBA during the GFC. Its share price was around $28 in December 2008, when the stock market was getting close to its crash low. One year before it was a $60 stock!
On last year’s dividend, anyone who bought in at $28 was on a 15.3% yield before franking. And with franking, we’re talking over 20%! This is the big appeal of buying historically great dividend-payers when they encounter a crappy crash of the stock market.
In 2008, CBA paid a dividend of $2.66. It was cut in 2009 to $2.28 but grew to $3.02 in 2010. By 2011, it was $3.25. It was the rebound of the economy and the stock market that made all this dividend rebound possible.
So you might feel bad about dividends this year but by 2021 your dividend-life will improve. And it should keep on doing so, provided the world can keep this Coronavirus recession from turning into a depression. US economist Mark Zandi defines a depression as a period where unemployment is 10% plus for over a year. The longer it lasts, then it gets to be called a Great Depression, which I don’t think has a ghost of a chance of happening.
Why? First up, there was no depression after the Spanish flu, where 50 million people died. And the calibre of macroeconomic policy management is miles better than the stupidity that prevailed in the 1930s.
If you’re investing to harvest dividends to live off, then you should have squirrelled away the great dividends of last year, which were ‘gifted’ to us as a consequence of Bill Shorten’s anti-franking credits policy. The public company response to unload their credits as special and bigger dividends meant my SWTZ had a total return of 18.87% and a yield of 8.05%. And with franking, the yield jumped to 11.49%.
But that was then. This is now. And my team says the dividend-destruction and deferments mean we could see our income harvested by the fund shrink to 2.7% after fees. Meanwhile my portfolio manager, Shawn Burns, has done a franking credit assessment and says his conservative view is that we’ll come in with a yield of 3.8%. That’s a huge drop but provided the economy rebounds as the RBA and IMF have predicted, we could see our stock market go higher. The history of the Australian stock market coming out of a crash is a 30% to 80% comeback. And while you can’t rely on the past, if there is some numerical and psychological connection to how we panic and sell-off when a crash happens and then rush to buy when the worst looks to be over, then I expect SWTZ to climb over 2021 as the 30 plus stocks in its portfolio rise.
Shawn points out that CSL has been a yield-killer for us but it has been a growth-giver to the fund and is now 7% of a fund purely because of its share price gains in recent years.
The smarties who believed in the fund and bought at $1.68 on March 23 have already gained 19%. This demonstrates the important rule of investing: the best time to buy dividend-paying stocks is when the market is mad, bad and dangerously panicking.
Long-term investors have a competitive advantage i.e. we don’t have to impress anyone like shareholders or investors in the short term so we can remain level-headed and greedy for reliable dividend-payers that could underpay in the short term but overpay in the long term.
This is the gospel according to SWITZ.
P.S.: We didn’t ask the ASX to give us the ticker code SWTZ, which is my nickname minus an ‘I’, but we were really happy when it came along by happenstance!
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.