A dividend investor’s guide to recessions, depressions and pandemics

The economic impact of the coronavirus pandemic should not be underestimated.

It is, in my opinion, likely to produce a severe recession in the UK as well as a global recession, and has already led to a swathe of dividend cuts and suspensions across UK and international markets.

How then should dividend investors deal with this?

If you’re risk averse, you could run to the safety of cash. If you’re risk seeking, you could remortgage your house and invest it all in ‘bargain’ shares.

Personally I prefer to stick to the basics, by which I mean a set of principles that apply irrespective of space and time, crisis or boom.

And for me, the most important principles are diversity, robustness and competitiveness, each of which I covered at length in this month’s Master Investor magazine, along with a couple of example stocks from my portfolio:

Coping with recessions, depressions and pandemics

Something I didn’t mention in the article is the importance of a cash buffer for income investors. Everyone has their own opinion of this, but for me, a buffer equal to about a year’s dividend, perhaps 5% or so, seems sensible. This won’t make much difference to your returns, but it will provide a cushion in the event of a major once-in-a-century pandemic, depression or other crisis.

PS Don’t think you’re an idiot if some or most of your holdings are suspending dividends. This economic environment is uncharted waters so lots of companies, even very defensive companies, are suspending their dividends just to be on the safe side.

PPS This will be my last Master Investor article for a while as I want to focus on finishing the second edition of my book, so I’d like to say thanks to the MI team for having me on board for a few years.

Author: John Kingham

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

18 thoughts on “A dividend investor’s guide to recessions, depressions and pandemics”

  1. John, Good article in difficult times indeed.
    On your two examples I took your old example and entered IG in the low 5XX a second time. Interestingly I decided to do the same with Plus500 after their directors bought in heavily. That has turned out well as has IG.
    One thing to be aware of though is the VIX volatility index. This peaked more than a week ago and the has been falling consistently. No one has a very clear indication of the time the Covid incident will level off, but several studies now believe a large % of populations are deemed to have had the virus and are now immune from it.
    It’s usually good to get ahead of events in these riskier companies that are subject to rigorous regulatory scrutiny. IG Group has suffered one bout of regulatory restrictions in 2018 resulting a sharp sell off, and could be subject to more. Plus500 has seen huge increase in customer numbers over the Feb/March period with almost a 300% increase in revenue and a big increase in new customers. Plus500 peaked at 2024 in on 7 August 2018 but that was a freak single event prior to the following stiff regulatory restrictions. The average over 5 years is around 1150 where it trades now — my guess is as the Vix continues to retract, the steam could easily come off Plus500 and quite possibly also on IG Group. The latter seems well financed, but it’s trading position is nonetheless unstable.

    Just some thoughts — Plus500 went ex dividend in February, but ironically it doesn’t pay until July — will they also cancel? IG Group has already paid its January dividend and has until September to decide on its September/October payout.

    On Telecom Plus, haven’t really looked at this, but a couple of comments indicate possible risk in that it has a high P/E, low 5% operating margins and weak dividend cover. It also appears to have a high % of stated assets as intangibles — how secure might that be?

    Most importantly — is not to get infected and stay safe.

    Regards LR

    1. Hi LR, I’m quite comfortable with IG. I think it’s a very special company, although of course that doesn’t guarantee success. It does have relatively high regulatory risk, but it’s very regulator friendly, e.g. targets ‘professional’ traders and doesn’t profit from client losses, so in theory tighter regulation should be good for IG, but we shall see.

      Plus500 is (or used to be) the opposite of IG, targeting ‘retail’ traders (i.e. non-professional) and profiting from client losses. Not sure if that’s still true following recent regulatory clampdowns.

      As for Telecom Plus, it should be (hopefully) relatively insulated from the crisis as it’s a telecoms/energy utility. The margins are thin because it uses the infrastructure of the big energy utilities and charges a small fee on top of those costs, hence the small margins. But the fee is mostly a fixed percentage so the “net” revenue (or gross profit) is relatively stable.

      The intangible assets are mostly a £200m 20yr licence with npower to resell that company’s gas and electricity, if memory serves.

      PE’s quite high because it’s capital light and doesn’t need to retain earnings, so most are paid out as a dividend. Also, amortisation of previously mentioned licence is a large non-cash expense (the licence will probably be renewed in 20yrs and funded by a rights issue).

      Anyway, my point with IG and TP is that they’re examples of what appear to be robust and competitive companies, although of course that doesn’t guarantee they’ll maintain dividend payments through this crisis.

      1. John — Sold Plus500 on the resignation of the CEO this morning. I figured a 40% gain was good enough plus a sizeable dividend. The cash will be on hand as the market takes another dive, which seems highly possible after the recent bounce. One can only assume here that the economy is going to be just dreadful for a good period of time.

      2. Unfortunately I agree with you on the miserable short-term economic outlook.

        Some investment houses are suggesting a big rebound in Q3, but that seems hugely optimistic. A more realistic outcome in my opinion is a W rather than V recovery, or multiple Ws as we zig zag in and out of varying degrees of lockdown. Hopefully somewhere in 2021 things will pick up, but how much depends on how much damage is done in 2020.

      3. I used the sale of Plus500 to add to some gold.
        Has done pretty well for me over the last 4 years.

        I realise this might not be on your radar, with the commitment to a balanced portfolio of productive, and in some cases not, companies. This is also my objective, but gold is now almost 4% of the portfolio.
        Here is an interesting view from BOA and in the light of the fiscal mess that all three continents are likely to experience over the coming years, I’m beginning to believe this big jump from $1700 to $3,000 is quite realistic if not maybe conservative.


        PS: Drax trading update this morning was well received by the market.

  2. Good read John – in terms of the diversification it would be interesting to know your views on re-balancing – what thresholds to use, and how often to check and carry it out.

    I agree food retailers are going to do well, but I’m not so sure about soap/toilet-paper manufactures – I suspect as these are non-perishable goods, demand will just fall when the crisis subsidies and people use up what they’ve bought.

    In terms of Telecom Plus I can see a lot of change in the telecommunications market coming up. Walking home the other night I saw Elon Musks’s satellites training across the sky for the first time https://www.independent.co.uk/life-style/gadgets-and-tech/news/elon-musk-spacex-starlink-internet-satellites-space-a9390001.html and I suspect that’s the way communications is headed.

    1. Hi Bsdb3

      My rebalacing rules are pretty simple. If a holding exceeds twice my default position size (I hold about 30 companies, so the default is 3.3%, so twice that is 6.6%) then I’ll cut the position in half. In practice I tend to rebalance at 6% to be on the safe side. The proceeds are just reinvested in the same way as dividend income, i.e. typically into my next new purchase or sometimes into existing holdings.

      Good point about toilet roll manufacturers. It’s more of a demand shift (from the future to today) rather than an increase in long-term demand. As you say, Dettol and Dove soap will probably see sales fall off a cliff in a year or so. But of course they’ll return to normal eventually.

      The future of telecoms: As an ex-Vodafone shareholder I think telecoms is hugely commoditised. I’m not exactly a fan of mobile phones, but the people I know who use the things have zero loyalty. They just go where the best deal is, hence Vodafone’s terrible returns on capital and (perhaps) future prospects.

      Hopefully Telecom Plus’s value proposition (competitive prices with multiple utilities through a single supplier and with a single bill and no need for customers to switch as there’s only one tariff, which appeals to people who value simplicity and not being ripped off over having the absolute best price) will keep them growing, but as with all things there are no guarantees.

      Anyway, don’t expect to get your internet from Elon Musk anytime soon:


      1. Thanks John – that sounds a good set of rules to follow. I’ve got investments across equities, bonds and gold, and check them on a monthly basis. The gold threshold is now close to requiring a sale to rebalance. I’ve been underweight equities for some time, and over weight cash but couldn’t force myself into faithfully following the rules over the past 2 years, with stocks looking expensive. I’ve started buying into equities gradually – I know I don’t know if they have further to fall or how long recovery might take so just making a monthy investment. However am also slightly concerned about shares recovering, and the possibility of inflation if I leave too much in cash.

        Also thanks for the link about Starlink. In terms of cost I guess Musk sees it as an opportunity to sell globally which would open a market in the hundred of millions. the economies of scale from that would drive down the cost of any technology required.

    2. BSD – good point and you know you are always at the bottom end of the trade with those guys. Best to buy in one sheet at a time so you don’t end up in the xxxx. Just saying !

  3. John – on another topic, as I’m bored in lockdown and it’s my birthday and I can’t even go for a pint – what about DRAX – they have a seven year contract on the crazy wood pellets and subsidised under the EU and UK government CO2 scheme. They will have no coal from next April and now have a profitable hydro and gas business. The directors spent millions on the stock two weeks back so I joined them – not with millions of course, but the debt looks reasonable, revenue and profit are on the rise and the P/E is about 5.
    Currently 200p but could easily rise to 350 and the yield was 10% now around 8. It’s ex div on 23rd April and it looks like it will go ahead.
    Not something I would normally bother with on relatively low ROCE, but the opportunity looks too good given the relative stability in the midst of this very insecure market.


    1. Hi LR, I don’t have much to say about DRAX as I haven’t looked at it in detail. It sits low on my stock screen (140 out of ~200) because it has low net return on capital (6%), lots of capital expenses (140% of earnings), funded by lots of debt (11x earnings) and really low growth quality.

      The low growth quality is probably due to the fact that the company recently borrowed more than £1bn to spend on acquisitions, driving growth through debt rather than retained earnings.

      From this 10,000 foot viewpoint it looks like exactly the sort of low return, capital intense company I try to avoid (!) regardless of price.

      1. John – I understand your views on this and they would be one’s I’d share in a normal market, but we are not in a normal market and no one can say when we will return to one. The are many “high ROCE” companies in the listings that look great in principle, but are unable to trade and it isn’t clear when they will be, resulting in a realistic ROCE of zero.

        The company has indeed issued new debt of £645M for the acquisition of hydro and gas stations which are both profitable and now that the wood pellet business is sanctioned and has government subsidies going out at least 7 years(with carbon agreements for climate change), it will have three profitable units and no further reliance on coal from March 2021.
        Looking at the historical debt ratio is possibly not that relevant, given that the projected earnings this year and next put the debt ratio closer to 7X, not 11X and therefore is not terribly high compared to other utilities. The cost of servicing that debt has fallen and it will be reasonably well covered by future earnings.
        The P/E is around 5 and yes the price may not be important in the principles of investing in a normal market — but right now this sings value.
        It will :-
        1. Trade and trade profitably
        2. Likely pay it’s dividend at around 10%
        3. Has significant director commitment as illustrated by recent buys
        4. Has a very low P/E against good growth in earnings this year – hence a PEG of just 0.5
        5. It has over £400M in cash — almost doubling within the last 3 years
        6. There are few new capital requirements going forward so it will have more profits falling through to the bottom.

        It’s by no means a darling, but it will double from the entry price of 156 and the dividend will be a bonus.
        Much of the retail, travel, hospitality and finance and property industries are likely to go bust — I don’t think Drax will.

        These are out of the box times I think John, and maybe this is a small example of out of the box thinking and opportunity.
        I like you, have certain investment criteria, but when times change, it pays to perhaps be flexible and change in some aspects of the portfolio.

        Regards LR

      2. Hi LR, well it sounds like you’ve done a decent amount of due diligence. It’s not one for me, but if you invest it will be interesting to see how things turn out over the next few years.

        Good luck!

      3. John, I admit this is more of a punt, so I don’t know if a few years will be adhered to. It is rather off the wall for me, but so far Plus500 has worked, also off the wall, as it’s up 50% and Sage seems to be holding its own.

        Scary times right now, we could see this market at 3500
        Keep some cash on hand!

        Regards LR

      4. LR

        Drax has a lot of debt compared with its forecasted profits.

        You may be able to buy it cheap and sell it a bit more expensive, but you are dependent on the commodity prices. I have no idea how to forecast those, so I cannot invest!

        The price of energy is going to go down, so a company with fixed cost like hidro, may get in trouble, especially if we have a dry summer.

      5. Eugen, Drax has £818M of debt and £683M of cash. It’s trading update came out this morning and the share price has taken off – up 7.11% at 211 as I type, so my 156p entry point looks pretty reasonable so far. They have also held the dividend of 9.5p to be paid next month, ex-dividend tomorrow.

        One of the few bright spots in a bleak investment world right now

  4. Hi John,

    My personal view is that due to quantitative easing the markets will remain fairly stable until the pandemic is over. Something I think you might have mentioned previously the current price of the major indexes is no lower than the price you might have found at the end of December 2018. Therefore in the immediate term it is unlikely you will find a quality company at a reasonable price.

    However what I do think will happen is that over the next two years opportunities may be found in sectors which have fallen out of favour due to change in market sentiments for the short term. This is where opportunities will be found however for the moments its more about being patient and trying to ride out this wave.

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