Dividends have rebounded strongly and much faster than normal following a recession. While the dividend recovery of individual companies varies, most regions should see 2021 dividends exceed pre-pandemic levels. The recovery has been especially strong in cyclical sectors or sectors that have seen the biggest impact from the lockdown of economies. Sectors like health care and technology, which benefit from strong secular growth trends, have also continued to grow. Profit margins are expected to hit new all-time highs in the coming year – not only in the US, where the technology sector has led to continued margin expansion in the past, but also in the rest of the world.
As long as the economic recovery continues, we expect dividends to benefit from the tailwind created by the strong positive improvement in company earnings that goes hand in hand with the economic upturn. Indeed, thus far, the earnings recovery has been ahead of the dividend recovery.
As a result, dividend cover has increased, suggesting that there is scope for further upside in distributions and certainly implying that current dividend levels are sustainable. What is more, it means that there is a larger buffer in place than there was pre-Covid in the event that economic recovery stalls. We believe that 2020 should be seen as a hiatus in the income generation from equities, rather than a permanent structural change. For those reasons, we believe investors that need income should consider keeping faith in equities.
Jon Bell, portfolio manager, Newton Investment Management.
Doc ID: 778148