By Leon De Wet

The coronavirus is driving a perfect storm for equity investors. Initially it led to the fastest bear market in history, with the next blow being a cut to dividends as corporate earnings decline. Even traditionally defensive areas such as infrastructure and listed property are being hit, in some instances very severely given the shutdown measures implemented. Add to this the expected cut to bank dividends (due to APRA’s directive that all decisions around discretionary capital distributions be linked to robust Covid-19 stress testing) and it is hard to see how investors can avoid a drop in the income received on their equity portfolios in 2020.

The speed of the economic recovery is of course uncertain but recover it ultimately will, along with corporate profits and dividends. A word of caution though, even if the economic recovery is reasonably swift, given capital raisings and in some instances elevated payout ratios heading into this crisis, it may be several years before the dividends per share once again reach peak 2019 levels, at least at an index level. That said, with the benefit of franking credits, dividend yields of circa 5% are still probable and remain very attractive relative to defensive alternatives like cash and government bonds.

In summary, income cuts are coming for equity investors in 2020, dividends per share paid in aggregate will recover albeit likely gradually and dividend yields remain attractive.

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