Following 12+ extraordinary months in the COVID “normal” world we have seen a large impact on investment dividends particularly in Australian equities. At the same time income from cash and term deposits has never been worse with a CBA term deposit currently paying a paltry 0.30% for 12 months.
During the peak of COVID uncertainty (and fear) in February 2020, many companies transitioned to immediate survival mode and banks worldwide made large provisions for bad debts (loan write offs). Soon after, APRA issued guidelines to our listed companies to be cautious which resulted in many businesses taking the precautionary step of substantially reducing or cancelling dividends to protect company balance sheets (thereby providing shareholder capital security).
This resulted in a significant drop in dividend and distribution payments for calendar 2020 and early in 2021. The trend of quarterly dividends including the COVID adjustment paid by our largest 300 Australian companies (measured by ASX300 excluding franking credits) is highlighted below.
In every ‘crisis’ there are important tests to portfolio design and construction. In this period when ANZ and Westpac (historically high dividend payers) deferred April 2020 dividends completely, other companies like Australia’s largest healthcare company CSL (traditionally low yield) paid its largest ever dividend. Since the June 2020 quarter, there have been record profit growth from some industry sectors (and consequently a strong rebound of dividends) whilst other businesses continue to struggle in the wake of COVID lockdowns. This reiterates the need to hold large numbers of companies and sectors in many regions.
The chart above highlights the quarterly distributions from the Vanguard Australian Share Index Trust during the COVID ‘freeze’ and how quickly the last 3 quarterly dividends have reverted to mean levels. In July 2021 we expect 30 June 2021 income distributions will be higher than usual, reflecting the strong economic rebound.
Following extraordinary government stimulus pumped into the economy including construction and housing grants, there are now signs of significant building supply stock shortages and steep price rises. This is further compounded by the international shipping liners being impacted with restrictions on changing crew in different ports, consequently causing long delays in arrivals. This indicates inflation is on the rise which is the likely consequence of worldwide government actions to fuel economic growth, getting more people employed, increasing the velocity of money in the economy, which will, hopefully, increase tax revenues to enable debt repayments. The crucial timing decision yet to be made by global reserve banks is when to start increasing interest rates to dampen activity, if inflation rises too strongly. At this moment, the forward-looking bond market anticipates any rise is 2+ years in the future, with forward interest rates pointing lower in the short term. If this policy setting remains, conditions can be expected to remain favorable for economic activity and growth.