The potential impact of coronavirus on dividends

Investors who rely on dividends for a large part of their income should prepare for significant dividend cuts and suspensions in 2020.

In recent weeks, stock markets around the world have crashed as a direct result of the coronavirus pandemic.

In most corrections and market crashes, dividend investors are able to shrug off paper losses and focus on what really matters; their reliable stream of dividend payments.

But in the current crisis that may not be so easy.

The limitations on free movement of people and goods being put in place to slow the spread of the virus will have (and are already beginning to have) a significantly negative impact on the ability of most companies to generate the cash they need to pay dividends.

Already we’ve seen dividend suspensions from Marks & Spencer, Kingfisher (B&Q and Screwfix), Weatherspoons, ITV, Stagecoach and many more.

So how bad could it get? Of course we don’t know, but history may provide us with a few clues.

S&P 500 dividend cuts during previous crises

Thanks to professor Robert Shiller we have data on dividend payments of the largest 500 US companies going back more than a century.

This is very handy as it covers a period with multiple world wars, pandemics, oil crises, recessions and depressions.

So let’s have a look at what sort of damage a major economic disaster can do to the combined dividend of 500 very large companies (I’ll refer to these 500 companies as the S&P 500, even though that index didn’t exist 100 years ago).

Over the long-term dividends go up, but in the short-term they can go down

The chart above shows a nice trend, with dividends carried upwards by a mix of inflation, population growth and economic growth per person over the last century and more.

However, within this long upward trend there were many periods where the S&P 500’s dividend declined in both nominal and real terms, and some of the declines were quite severe.

For example:

  • Post-World War One recession and the Spanish flu pandemic (1918-1926): Dividends decline by as much as 33%
  • The Great Depression (1931-1937): Dividends declined by as much as 55%
  • World War Two and related recessions (1937-1949): Dividends declined by as much as 48%
  • Stagflation (1966-1990): Dividends grew in nominal terms, but thanks to high inflation they declined in real terms by as much as 25%
  • Global Financial Crisis (2008-2012): Dividends declined by as much as 24%

So the combined dividend of the 500 largest US companies has decline, multiple times, by more than 20% to more than 50% over the last century.

Given that fact, is it reasonable to think that the coronavirus pandemic has the potential to be as damaging to the global economy and to dividends as previous world wars, pandemics, depressions and financial crises?

I think the answer has to be yes.

Dividend-dependent investors should prepare for the worst and hope for the best

I think it is entirely reasonable to assume that the current pandemic has the potential to cause very deep recessions in many countries and perhaps even a global recession.

I also think it’s reasonable to be prepared for dividend payouts from the S&P 500, the FTSE 100 & 250 and other major indices to decline by 50% or more, for at least a few months and possibly a few years.

And of course dividend declines could be much larger for individual companies, many of whom will suspend their dividends entirely and some of whom may go bust before their dividends are ever reinstated.

I’m no financial advisor, but if you depend on dividends for a significant part of your income then I suggest you do some scenario planning in which your dividend income declines by 50% in both 2020 and 2021.

And if you’re heavily exposed to companies that have lots of debt, weak profits and an inconsistent or nonexistent track record of growth, rather than companies with low debts, strong profits and a consistent track record of growth, then you may have to prepare for a significantly larger drop in income.

To benefit from the recovery you have to survive the downturn

While coronavirus is very bad, it is unlikely to be the end of civilisation or capitalism as we know them.

Eventually (hopefully within one year, probably within two years) the global economy, share prices, dividend payouts and life in general will recover.

But to benefit from the recovery, you have survive the crisis.

For dividend-dependent investors that generally that means:

  1. Having a cash buffer: Shares or other investments sold at low prices to generate a cash income cannot benefit from the recovery
  2. Cutting expenses: Removing unnecessary expenses so you don’t burn through your cash buffer too fast
  3. Not panicking: Not selling in a blind panic even if the stock market declines by 50% or more

I’m sure there are other more nuanced guidelines for surviving a global crisis, but those are the big ones for me.

How big should your cash buffer be?

It mostly depends on the ratio between your fixed expenses and your investment income.

If you have fixed expenses of £20,000 per year and receive a dividend income of (about) £50,000 per year, then you probably don’t need much of a buffer. You should be able to sail through a 50% dividend decline with no major problems.

On the other hand, if you need every penny of your dividend income to cover the basics and you also work part-time to top that up, then you should probably have a bigger buffer, relatively speaking.

But how big is big enough?

That’s for you to decide, but here’s a handy rule of thumb from the Money Advice Service:

“A good rule of thumb to give yourself a solid financial cushion is to have three months’ essential outgoings available in an instant access savings account. So if you lose your job, for example, it’ll help buy you three months to find a new one.”

Money Advice Service – Emergency Savings

If you want more than three months as a buffer and can afford it then great, but I think having a buffer that can cover three months’ of fixed expenses is a good minimum.

If you’re looking for some additional information on how to prepare for a recession, or what to do when the stock market collapses, here are a couple of good posts from the Monevator website:

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

43 thoughts on “The potential impact of coronavirus on dividends”

  1. Hi John, Sadly there is no potential about it, it’s happening almost by the hour – cut after cut.
    Fortunately so far I have suffered only 4 cuts. I have very little exposure to retail having sold Next at £58, have a few MKS which is a total disaster of a company, restaurants, pubs (sold Fullers and Greene King was fortunately bought), no airlines, no banks apart from a small position in Lloyds.
    In terms of divdend security – hazard a guess:-
    National Grid — this could go quite high now as people flock to invest for a more secure divi
    BATS — looks good despite the fact the share price is fagged out.
    IGG and Plus500 provided the regulator doesn’t bark louder
    LGEN and Aviva provided the payouts on Coronavirus are avoided
    Diageo and Unilever more than likely
    Nichols – share price is also looking attractive
    PZ Cussons – they can’t make the handwash fast enough
    DS Smith — Those Amazon cartons are really going to fly

    Everything else looks as flakey as the ice cream cone Ben and Jerry’s serves up.

    The world is going to look very different from here – it is a lesson in what is and isn’t particulary investable (certainly from a risk adjusted viewpoint).
    Insolvency practices are going to be busy — do you know any worth investing in?


    1. I’ve certainly had more than four so far and unfortunately I expect many more.

      The only glimmer of hope is that we know with near 100% certainty that a medical solution is coming within (probably) two years and (hopefully) within one year.

      Hopefully the antibody tests will work and be scalable so that we can start to give people some sort of “I’ve had coronavirus” ID and get them back to work ASAP.

      1. John, The other encouraging thing is the rate of growth in cases in each region follows a similar pattern whereby it tracks an asymptotic curve and ultimately the death rate and new cases falls off.
        I’m hoping the UK has already started, although it is too early to say.
        In Italy they started on the downtrend on Saturday.
        In the UK they assume we are weeks behind Italy, but maybe not, there are now reports that some guys caught it in January in Austria whilst skiing. If that is the case it is just possible that may more have already had it in an asymptomatic form or so mild they assumed it was a cold.
        UK deaths fell from 87 to 43 yesterday and the number of new cases was similar, i.e. not doubling which is what is expected on the ramp up.
        I think the US is just going to let it rip through the population.

        Oh well, you do start to realise that the stock market is just a game and real life, or otherwise, happens in the meantime.


      2. The decline in UK deaths is encouraging, but as you say it’s too early to tell.

        The important thing is to assume that everyone outside your household (EVERYONE) you see has coronavirus and treat them accordingly.

        We’re even quarantining mail. It has to sit in the enclosed front porch for 24 hours before being allowed in the house!

  2. Thank you for producing something interesting, informative and relevant when quite a few others who do a lot of chest-beating during the good times now seem to have gone missing.

    1. Yes – agreed, John tells it how it is, highlighting the wins and the losses in equal detail.

  3. Great aricle as always John.

    Assuming up to 50% cuts in dividends over the next year (maybe 2?) is prudent.

  4. This is probably some of the best advice you have ever given, many thanks.

    Great idea about arriving post as well, thx

  5. Hi John – great article as always and although I know you write from a UK perspective, this is exactly what we see here in Canada. What the US does is – as always more important for us and who knows based on the current words coming out of The White House. I think it depends on the mix a great deal as some companies will have to deal with pent up demand and others, especially with the fiscal stimulus are going to benefit from the behavioural response once its behind us of “thank God its over – we need to have a treat / go out and buy something special.” We will see. As someone who is retired and opted to a higher risk mix I have seen my equity “tank” however the total decline is quite a bit less than market averages – so I think that with quality stocks we shall see less of a dividend impact. Time will tell.

    1. Hi Nick, thanks. I’m seeing even quite defensive companies suspend dividends just to be cautious. Domino’s Pizza (UK) is a good example from my holdings. Its delivery sales are up for obvious reasons, but the dividend has still been suspended just because we have no idea what’s going to happen this year.

      It’s potentially a big pain for dividend-dependent investors, but from a corporate point of view extreme caution makes sense. The worst thing for a company to do would be to pay a dividend and then have a cash crisis which needs to be fixed with a rights issue, which would obviously be at an incredibly low and dilutive price given the current market environment.

      Let’s hope a) we survive this and b) there is a post-pandemic boom in demand for travel and leisure, clothing and so on. But as you say, time will tell.

  6. Do not bother to look at dividend cuts. You may say, you would expect to hear this from me, as I have none, so far! In fairness, a few companies I invest, like Amazon or Facebook, were not a dividend payer even before! (I do not like dividends, they are a nuisance)

    The most important issues:

    The company survives, without a bailout or a rights issue who dilute you;
    Their market does not change – no point in owing a REIT who owns high street outlets, when the inevitable with happen now a lot earlier – they move to a presence online mostly;
    Clients would not change behaviour towards their products and services. This is a very important point, because their clients are home reflecting ‘I can do without going to the pub’, ‘we can do without 3 holidays a year’. Clients behaviour does not change easily, but it could change;
    The company does not make a PR mistake in this period. It is very easy to do one!

    1. Hi Eugen, your point about behavioural change is a good one.

      It seems very likely that this will just speed up the transition to an online world, where more people work form home and shop using their mobile.

      Being on the wrong side of this trend is not going to be pretty.

      As for things like pubs and holidays, my guess is it may have a positive impact, at least for a year or two. In other words, when this is over people may realise how much they love going to meet friends at the pub and how much they love going on holiday. Especially once they’ve been locked in their house for many months.

  7. Hi John,

    I’m a regular lurker, another great piece from you, some rationality goes a long way.

    I wondered if you have any concerns about individual sectors or ftse 100 constituents and their solvency. I’m wondering if the market properly reflects corporate debt levels and this credit risk.

    I’ve been reading the other comments which present a view that people will eagerly take the opportunity to travel and trade. I’m a bit more pessimistic. I expect the recent stories of deaths and international tragedy to leave a lingering unease with travel and general consumption during a period when the virus is post-peak but continues to present a risk. Months of lost/lower earnings during the pandemic and a sense of personal financial responsibility and caution for what are optional spends.

    The stimulus was essential but with a conservative government there is a potential for renewed austerity after stimulus measures equating to 15% GDP. Perhaps Boris will instead proceed with infrastructure projects and more expansionary fiscal policy instead.

    I’ve gradually switched some cash holdings into equities, mainly with a value investing approach: Berkshire and Vanguard’s value fund, increased my holdings of McDonald’s just prior to the stimulus package and bought some utilities etc.

    I continue to hold broad FTSE 100 trackers with banks, homebuilders, airlines, miners and oil companies which does give me some cause for concern about debt obligations in a protracted weak period.

    I know you may not advocate selling at a low and I also perceived the FTSE 100 was at fair value in 2019 and we could not have foreseen a viral pandemic. There are no crystal balls and I know you prefer to purchase companies individually based on solid valuation metrics. I just wondered if you had any thoughts on credit risk and behavioural economics which were impacting your current investment decisions. All the best, Keith

    1. Hi Keith

      Thanks for the excellent comment.

      I think solvency is definitely a major concern for a lot of companies. Within my portfolio many of the holdings are in talks with lenders or have taken significant action to free up cash (sale and leaseback is a common option, e.g. Ted Baker’s head office sold for £72m net of fees).

      Most of my holdings are fairly low debt, but even there the scale of uncertainty is huge. Next (another holding) has closed all stores and even stopped taking orders online to protect warehouse and distribution staff, so the impact of this pandemic and the entirely correct lockdown is simply enormous.

      We just have to work on the assumption that it makes more sense for the government to support people now and keep viable businesses and banks afloat rather than let them all go bust and then have to support people with welfare anyway.

      But yes, expect many companies in exposed sectors with lots of debt or lease obligations to either go into administration or try to raise cash through rights issues.

      As for the pandemic changing people’s behaviour, I don’t think people have changed much in the last 100k years, so I don’t think this pandemic will have any impact over the longer-term. For a year or two, possibly, but beyond that I doubt it.

      People like travelling, they like going out and meeting friends, so I think it’s virtually certain that travel & leisure business will eventually recover and prosper.

  8. Hi John,

    Whats really interesting is that at times like this good old manufacturing companies are invaluable and I do believe that the government should give these companies more protection from short term profit engineering a common pressure from activist investors, Wall Street and the financial hubs of London.

    In this time of crisis I find it really interesting to note that society is depending on engineering companies like Babcock, Airbus, Rolls Royce in UK, German car manufacturers, American car Manufacturers, Korean and Japanese engineering firms to come up with solutions like the ventilators.

    However under normal circumstances as an investor I would look down on such companies. Pretty humbling if you ask me. I really hope these companies are protected from the likes of Carl Icahn and Nelson Peltz.

    Manufacturing is a vital skill which we really should keep because you never know when you might need it. Only in desperate times do you realise this need.

    1. I agree. Along with food production, maintaining a reasonable and diverse degree of technological capability (design and manufacturing) is sensible, even if it seems inefficient (i.e. could be purchased cheaper from abroad) during normal times.

      The government already does this to some extent, with the government passing huge engineering projects to BAE or Rolls-Royce or others rather than foreign alternatives.

      And there was/is all the arguments against using Chinese tech for nuclear power instead of developing our own. Even if it does cost more to the taxpayer, at least the money goes back into the UK and enhances our self reliance. That’s a form of protectionism, but some protectionism is sensible in an uncertain world.

  9. UK banks ordered by the BOE not to issue dividends. Oo errr is this gonna be worse than we thought?

    1. Possibly. What I’m seeing play out is a lot of cautionary dividend suspensions. This is entirely sensible but not ideal for income investors. I think many retired investors will be forced to either a) drastically cut back expenses or b) sell a few percent of their capital to fund income this year and just accept it as a (hopefully) once in a lifetime slice of very bad luck.

      1. Most people I know have a cash buffer against unexpected turns. Whether they have enough to weather a turn THIS unexpected is debatable, of course. Just my 2 cents, but I’d say that if you have less than a couple of years expenses in readies, now might be a good time to liquidate some bonds, figure out how to cut expenses etc.

      2. I’m not sure it’s a good idea to start liquidating now, but a review of what could be liquidated would be a good idea. And assessing where expenses could be cut, if necessary, is definitely a good idea.

  10. Hi John, hold or should say held quite a few of your stocks & will say your system is a good one.However I feel we have a game changer due to Coronvirus & been selling on rallies,my portfolio is looking pretty grim at the moment.This feels a lot worse than 2008 ,as we can see from divi suspensions& equity raises.Valuing stocks is near on impossible or meaningless,at this moment in time am 60/65 cash with the majority of 35% showing big loses. I’m not normally the type to bail out at these levels with 30yrs of investing experience,i don’t think there’s any one stock ifeel comfortable holding, so over the next month or two im hoping to be 85% cash.

    1. Hi Michelle

      Thank you for your honesty. I’m sure many people feel the same. I agree that it’s almost impossible to value most companies at the moment as we have no idea what shape they’ll be in 3, 6 or 12 months from now.

      As you might expect, I have no intention of selling anything yet, but it certainly isn’t easy. I’m just waiting for this initial 12 week lock-down to end and then see where we are in terms of flattening the curve, economic damage, drugs that might help, antibody tests, regional as opposed to national lock-downs etc etc.

      Stay safe,


  11. Hi John,

    I’ve placed a separate comment because its on a different subject something raised by Michelle. Personally I think what Eugen N said makes a lot of sense. Now I prefer a company that pays dividend for the simple reason that if I’ve managed to find a really good company I would rather not sell instead if it can grow its dividend at minimal expense and can do so for a long period of time I would rather keep the stock.

    A key test for me is to actually check the durability of the company and I like looking at very old companies which have gone through some real tough times.

    These include Colgate, Hershey and RELX. What makes these companies stand out is that they are light on asset, have a decent return on capital, good cash flow and consistent performance. It also makes competitors less willing to enter to compete in these market. For example RELX owns the Lancet which is one of the oldest and most prestigious medical journals. I know this because I referred to it during my time as an Undergraduate for clinical studies. Now for obvious reasons Lancet is unlikely to have a new competitor this almost gives Lancet and a few other journals an Oligopoly and allows them to charge a premium for subscription.

    Companies like Hershey, Colgate and RELX will be fine because they deliver some form value to their users and will be needed all the time war, depression, recession and now pandemic.

    Unfortunately in situations like this companies which have high levels of CAPEX, poor cash conversion i.e. most parked as receivables and eratic performance should be avoided. I would say that it might be worthwhile considering whether to cut your loss with such companies.

    Last year I was thinking of investing in Cineworld because of the price drop but my abysmal performance in AA forced me to take a rain check. I had no idea that this pandemic would happen. Instead what made me unwilling to invest in Cineworld bargain shares is because the movie industry seemed to be dependent on film franchises many which are coming to an end. This made me feel uncomfortable to invest in Cineworld it seemed to speculative since without the film franchises the box office would slump.

    My short advice to anyone is not to stop investing but look for quality companies!

    1. Hi Reg, good points one and all. My issue with Cineworld would be that it seems to be on the wrong side of a secular trend towards better and better home entertainment, i.e. huge cheap high definition TVs, a million and one channels, streaming or otherwise, better sound quality, Just Eat for a wide variety of food while you watch a movie, etc.

      And yes I agree; quality first (although I prefer the term “special”), price second.

      1. Hi John,

        Thats very true and I think this partly relates to the fact that the equipment required to shoot a production is more affordable now. Therefore the barrier to making a high quality production is lower for smaller production companies. This directly increases competition for movie studios as both group vie for the same consumers. In the past there was a significant difference between the quality of tv shows and film which gave films and cinema a competitive edge.

        For example I think the BBC production Pride and Prejudice from 1995 is a master piece but it hasn’t aged very well especially if you compare it to Sense and Sensibility film by Ang Lee which was released in 1995.

        Around that time only tv shows that had film like production budget have managed to produced shows which stand against the test of time such as ER. If you watch the show ER from 1994 it looks like only a few years old. However ER had a huge budget nothing a small tv production can match back then.

        As things stand now if you try to compare the quality between a current show made by BBC/ITV/Channel 4/Netflix/movie studios against films there is very little difference in quality. I must admit though I never thought of the 4k mega TV sets and film quality sound kit available at affordable price probably has shifted the move towards in house entertainment.

        In a nut shell boy am I glad I stayed away from Cineworld.

  12. Hi John
    Always interesting to read your articles.
    Is the virus prompting you (or others) to have a think about -why- you want high dividend stocks?
    Sign of a cash generative business, in good health, confident. All good. Until a crisis hits and the security blanket gets whipped away.
    ‘Provides a regular income rather than requiring sale of some shares to raise cash’ and ‘enhances the share price rating’- dont wash for me.

    Obviously all things being equal a 6% dividend is preferable to a 1% one, but … I’m wondering whether we should rethink. Eg focus on cash generation, mid to long term growth prospects, risks, and resilience, ignore dividend policy.

    Like you, i’m mainly sitting tight at the moment re investments. Managing to look at this dip as a potential fire sale, 1/3 off everything, rather than a cause for panic.

    1. Hi David, personally I like high yield stocks because a) dividends are paid in cold hard cash can’t be clawed back (!) and b) there’s a lot of evidence that on average, and over the long-term, dividend stocks produce better returns than non-dividend payers, and c) I’m a value investor so all else being equal, I’ll go for the higher yielding stock over the lower yielding one.

      “I’m wondering whether we should rethink. Eg focus on cash generation, mid to long term growth prospects, risks, and resilience, ignore dividend policy.”

      I do pretty much all of that already, so while dividend yield is a factor, it’s just one of many. What’s more important is that the company in question is likely to grow its dividend over the next five or ten years, and at a rate where dividend yield plus dividend growth equals a decent return (more than 10% annualised is my preferred minimum).

      As for whether this is a fire sale, I think that’s a fair description. But it’s a fire sale because the building’s on fire, so you have to make sure you’re buying something cheap that’s still intact, rather than something cheap that’s already on fire!

      1. As one of those who had been concerned about valuations for some time, esp US S&P CAPE, fortunately entered this down turn with 50% Cash. What was unexpected was the nature of the ‘Black Swan’. In spite of stock buying through the slump Cash has risen to 58% , as other assets declined.

        Very much a yield investor now thinking along following tentative lines :-
        + a focus on 5 to 10 year horizon for recovering? dividends, which involves brave assumptions – any thoughts ?
        + a focus on P/B with book values perhaps being not so flighty – but how much might book values be hit ?

        Difficult times when health is the priority over money matters.

        Thanks as always for the excellent insights.

      2. Hi Bob, I’m with you on your bearish S&P 500 CAPE viewpoint. That index has been very optimistically priced for many years.

        However, despite the world potentially facing a recession on a scale we haven’t seen since the great depression, the SP500 is only down 18% from its record high, and is only back to where it was in early 2019. So even a pandemic and near total lockdown hasn’t shaken investor confidence in the US market.

        “a focus on 5 to 10 year horizon for recovering? dividends, which involves brave assumptions – any thoughts ?”

        I don’t expect the recovery to take 5-10 years. I think 1-2 years is more likely, although I think a lot of over-leveraged companies will be dead (or owned by lenders) so there won’t be a recovery for their shareholders.

        The key seems to be a) to have resilient cash flows or b) be able to raise debt or equity to provide some much-needed short-term cash.

        “a focus on P/B with book values perhaps being not so flighty”

        Possibly. I prefer to look at 10yr averages as a way of getting around terrible one-year earnings, e.g. 10yr average earnings, 10yr average returns on capital etc. price/book is entirely legitimate if used with return on equity or capital, but it just isn’t how I do it.

        The key is to focus on companies that can a) survive the next year b) thrive over the longer-term and c) aren’t ludicrously expensive because everyone else has had the same idea!

        Easier said than done.

  13. S&P – “However, despite the world potentially facing a recession on a scale we haven’t seen since the great depression, the SP500 is only down 18% from its record high, and is only back to where it was in early 2019. So even a pandemic and near total lockdown hasn’t shaken investor confidence in the US market.”

    That’s what printing trillions of dollars can do for your stock prices 🙂

    Shame that it’s a long term failing strategy, or we could all just take it easy, and let the Fed print us our salaries…

    Without all the stimulus, who knows how low it would be by now. Or whether the 2019 surge upwards would even have happened.

    Just my 2cents, but it looks to me like we’re now in the middle of the mother of ‘bear market rallies’. I’ll personally only start to think the all clear is sounding if it continues upwards past about 0.7 retracement. Otherwise it’s the good old pump and dump, to lure in the suckers one mo time.

    1. I’m scribbling an SP500 CAPE valuation article at the moment. Basically the US market is still expensive relative to historic norms. Not cheap, not average, but expensive, despite an impending mega-recession (probably).

      I think it’s two things:

      Anchoring: Investors don’t like accepting massively lower prices, so the stock market only falls so far, regardless of how bad the news is. The same thing happened in the dot com bust, where prices went from stupidly expensive to slightly expensive, but not cheap.

      Recency bias: 10 years ago we faced the total collapse of the banking system. This was enough to drive stocks to very low prices. However, the Fed rode to the rescue and everything worked out fine. That’s fresh in the minds of investors, so they expect a huge government support package and they expect everything to be find in a few months or a year. So no massive sell-off, regardless of how bad the situation appears.

      There is a third option, which is that Mr Market is right not to aggressively sell US shares because the downturn will be v-shaped. I hope that’s correct, but it does mean the US is still slightly expensive.

      1. A lot of Americans (at least on forums) seem to be pinning their hopes on a ‘V’ shaped recovery. That would make this the shortest bear market in history, one more record for its tally… Personally, I truly feel the US market is mis-pricing the macro risk, and much pain will ensue. Time will tell, I suppose, and not even very much of it, because it’s already retraced back up to ‘whoopeeee! Here we go!’. Interesting times…

  14. Hi John.
    My views on America is they have the best businesses in the world & hence you have to pay for quality,S&P has from 2008 to it’s 2020 high almost 5 bagged,if we suppose it stays at these levels going into what is almost guaranteed downgrades then we can assume the cape ratio will be a lot loftier maybe be close to record highs,even more startling on entering a Recession.Fed fund rates in 1973/74 recession were 10% today 0.25 this is a very different environment which, meant you could earn decent returns from fixed income, not now, that is why earnings multiples in the 70s were so low & why they are so high today.Fixed income competed for investors money then, which is what keeps driving equities higher today,if anything , the new policies of the fed only make equities more attractive compared to other assets,longer term I fear for there grand children who are going to have to pay for this along with ours to.Scary times equals scary measures.

    1. Hi Michelle, I agree with your point on interest rates. They are at record lows and so the search for yield drives money into equities (among other things). So even though share prices are high and dividend yields are low, those dividend yields are still much higher than bond yields.

      The problem is that to sustain those valuation, central bank interest rates need to stay at record lows, essentially forever. I’m not sure that’s very likely given the amount of liquidity pumped into the global economy now and over the last decade.

      And if interest rates get back up to 5%+ then current equity valuations in the US make less sense.

      As for who pays for all this, I have no idea how it will turn out. I guess it’s a bit like the two world wars. We have a massively expensive ‘event’ which we fund to some extent with debt, which is then paid back by taxpayers over following decades. It’s a bit like insurance where we spread the cost of risk across as many generations as necessary.

    2. // S&P has from 2008 to it’s 2020 high almost 5 bagged//

      There’s evidence the only net inflows into the S&P during that period were corporate buybacks. That looks to be less of a boost going forward. And incidentally, those buybacks may have boosted the market over the last few years, but economically, the US has pretty much flatlined. Go check out the FED charts of corporate profits the last few years. I wouldn’t touch the US witha yours, not until it gets down to a better P.E ratio

  15. Thanks John for your reply.
    Agree totally if interest rates rise , looking at the shiller cape ratios that could mean America expected future annual returns over 10yrs might be 0.I also like to look at Warren Buffetts favourite indicators price to GDP,which also indicates America is exspensive,personaly can’t see interest rates rising much for quite a few years.

    1. Stock market returns come from dividends, earnings growth, and changes in the earnings multiple. That is all. If investors in the future are willing to pay the same multiple as today, dividends are steady at 2%, and earnings grow at 4% per year, the return to holding stocks will be 6%. 6% is roughly the long-term compound return on US and foreign equities over the last century, after inflation. So where are we right now? The price multiple of the S&P has expanded from 12 to a high above 29 over the last decade, a growth rate of 9%. When we add in the 4% annualised growth of Shiller earnings (from $63 to $97) and a dividend of 2%, we arrive at our real total return of 15%, which is what the S&P has returned, compounded over that period. So unless investors continue to pay 9% more every year for each dollar of earnings (such that by 2028 they pay $70 for $1), 15% is an unsustainable rate of return. Also keep in mind that the global average CAPE is roughly 20 today, despite the fact that long-term returns to foreign stocks are roughly equivalent to US stocks. There is no historical US valuation premium, and the US sometime trades at a discount, as it did in 2005-7. If we use the same methodology John uses when calculation forward potential, you get a real rate of return for the S&P somewhere between -1 and 2%. Not looking that great, is it?

  16. hi john
    just recieved my quarterly dividend from VUKE expecting it to at least half of what 2019 april div was and its only slightly less? only 20% down given that the total fund value is 30 % down
    what do you make of that?

    1. Hi Dawn

      There are a few things that come to mind:

      1) Normally we might expect dividends to go up by 5% or so (although depends on whether your fund is accumulation or income, i.e. reinvests or pays out dividends). If it would have normally gone up by 5%, then a 20% decline is a 25% decline relative to where it might normally have gone.

      2) This crisis is only just beginning. Let’s wait and see what the next dividend payment is like.

      3) A dividend decline of only 20% is good news. Better that than a more significant decline (although we may have that to come).

      4) The value of the fund has only a very loose connection to dividend payments. So if the value of the fund is down 30% and dividends are down 20%, that’s completely normal (although not exactly brilliant). All this means is that the yield has gone up, because price fell more than dividends.

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