Progress ain’t what it used to be…

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All statements made in this article are opinions of the writer(s) and are not to be constituted as advice. Please refer to our full Risk Warning at the end of the article.


Time was, most UK companies aspired to have a “progressive” dividend policy. This meant that they hoped to pay a dividend per share that was a little more this year than it was the year before. In good years this meant that dividend cover would rise (because earnings had grown faster than dividends) and in leaner years the dividend cover would take the strain, allowing the dividend to continue to grow. The degree to which dividends were increased were an important indicator of director confidence in the prospects of a business. A dividend cut was a sign of extreme concern on the board.  

Covid-19 caused an avalanche of dividend cuts and a dramatic and very healthy rebasing of dividend cover, offering the chance for dividends to grow steadily for many years to come. Perversely, while the ability of companies to grow their dividends significantly improved, company boards seem to have suffered a widespread loss of confidence. Many companies have re-appraised their dividend policies. Fewer talk about a progressive dividend today. Instead, many prefer to target a level of dividend cover (or its converse, a pay-out ratio). The problem is that with profits now forecast to fall across the UK stock market, the application of these pay-out ratio policies imply dividends will also fall this year. It is a cop out for directors to duck having to think about the right level for dividends. It is also an unpleasant prospect for the income-oriented investor.

It also removes an important support for share prices. A predictable dividend can act to put a floor under a share price. It can provide a line in the sand. But now, there is a danger of boot-strapping downwards: if the recession bites, earnings fall, dividends now get mechanically cut, which removes any yield support, taking shares down further. Rinse, repeat, all the way to the Poor House.

Balance sheets, in general, are in good shape, so companies arguably could hold their dividends in the teeth of falling earnings if they wanted to. Some brave souls will, even though it means they will be immediately breaching their relatively newly minted pay-out policy. But this is not the message that is coming from many corporates. Indeed, there are some examples of companies cutting their dividends as earnings fall but using their strong balance sheets to buy back shares. Whoa! This is definitely not to be encouraged.

So what is an income investor to do? It is perhaps a good reason to take a pooled approach to dividend collection by owning a Fund that can focus on the fewer companies that are doing the right thing and look most likely to grow their dividends even in leaner years. That remains a key focus for the Slater Income Fund: not just owning stocks with a good yield but those where the prospects for dividend growth are brightest. Whilst there can be no guarantees, the Slater Income Fund still aspires to generate a progressive dividend for our shareholders even if current corporate policies have become considerably more primitive. 


Risk Warning: Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. Investors may not receive back their original investment. The Slater Income Fund has a concentrated portfolio which means greater exposure to a smaller number of securities than a more diversified portfolio. Charges are not made uniformly throughout the period of the investment. The Slater Income Fund invests in smaller companies and carries a higher degree of risk than funds investing in larger companies. The shares of smaller companies may be less liquid and their performance more volatile over shorter time periods. The Slater Income Fund can also invest in smaller companies listed on the Alternative Investment Market (AIM) which also carry the risks described above. The Slater Income Fund may invest in derivatives and forward transactions for the reduction of risk or costs, or the generation of additional capital or income with an acceptably low level of risk which is unlikely to increase the risk profile of the Funds significantly. This article is provided for information purposes only and should not be interpreted as investment advice. If you have any doubts as to the suitability of an investment, please consult your financial adviser. 

The latest Key Investor Information Documents and Prospectus is available free of charge from Slater Investments Ltd and on their website. You are required to read the Key Investor Information Document of the Fund and the Supplementary Information Document before making an investment. Telephone calls may be recorded. Slater Investments Ltd address is Nicholas House, 3 Laurence Pountney Hill, London, EC4R 0EU.

Slater Investments does not offer investment advice or make any recommendations regarding the suitability of its products. No information contained within this article should be construed as advice. Should you feel you need advice, please contact a financial adviser. Past performance is not necessarily a guide to future performance. The value of investments and the income from them may fall as well as rise and be affected by changes in exchange rates, and you may not get back the amount of your original investment.

Regulatory: Slater Investments Limited is authorised and regulated by the Financial Conduct Authority Registration Number: 165999


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