Global profits are estimated to fall by more than a fifth over the next year and dividends even further, according to an income fund manager.
Ben Lofthouse, fund manager of Henderson International Income Trust (HINT), says global profits could fall to £1.7 trillion (€1.9 trillion), down by 22% compared to last year, due to the Covid-19 recession.
“Normally in a recession, companies would flex their dividend cover target and dividends would reduce much less than profits, protecting shareholder income. So far, 2020 is proving to be different,” he said.
Last year, dividend cover fell as profits lagged payouts. In 2020, company moves to preserve cash by cutting dividends will “keep dividend cover more comfortable than in most downturns”, accordng to a report published by HINT on Tuesday. It is unusual in a recession for dividends to see more of a decrease than profits.
Lofthouse warned that companies with stock yields that are significantly better than others could “snare unwary investors” in so-called ‘dividend traps’.
Dividend cover, the ratio of a company’s income to its dividend payment, has been a strong indicator of dividend security during the pandemic, according to HINT.
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