Is ‘Dividend’ Now A Dirty Word?

Dividend legend Bill Miller, formerly of Legg Mason and now head of the Miller Income Fund, has started saying that “dividend” has become a dirty word. That’s coming from a guy who made 120% last year investing in dividend stocks.

Miller says dividend futures contracts are projecting a 20% drop in dividends this year and a double-digit drop again next year. He is projecting that dividend stocks won’t return to any sort of normal until at least 2023.

Instead, Miller says investors should be focused on bonds.

He’s not the only one.

A recent report from Janus Henderson predicts that more than a third of payable dividends could be delayed or cancelled this year because of the COVID-19 crisis. While the report acknowledges that is a “very pessimistic assumption,” it projects that if all the firms at risk of cutting their payouts do so, a total of $933 billion worth of dividends would be paid this year. That’s $436 billion less than last year.

The report also forecasts that in the best-case scenario, a total of $1.21 trillion will be paid this year, still 15% below last year’s payouts.

The timing of the report is interesting, consider a total of $275.4 billion in dividends were issued in the first quarter, a 3.6% increase over last year. Janus Henderson says that’s because first-quarter dividends had mostly been paid before the COVID-19 crisis came into full swing.

That said, unlike Miller, Janus Henderson doesn’t believe dividend stocks should be avoided entirely.

The report makes the case that while all dividend payers will likely be affected, the burden won’t be equally shared.

For instance, banks and more defensive sectors are receiving government support, helping to keep those business viable. That’s important, since bank dividends account for $1 of every $6 worth of dividends paid annually.

Janus Henderson also believes that dividends paid by North American and Asian companies will be under less pressure than their European counterparts. That’s because the European Central Bank has made assistance conditional, especially for banks, on companies suspending their payouts.

Janus Henderson also believes that, while this crisis has been largely unprecedented, we’ll see a meaningful recovery within the next year or so.

While I’m not as pessimistic as Bill Miller, I don’t share Janus Henderson’s optimism, either.

I believe the depth and magnitude of this means we will see a longer, more drawn-out recovery.

While there’s promising news on the vaccine front, we’re still months away from one actually being available. Even then, initial supplies will likely be sent to the hardest hit areas and distributed first to those most at risk.

On top of that, while businesses are beginning to reopen, those openings are being staggered. And many businesses aren’t going to reopen having fallen victim to months with no revenue.

I believe it’s going to take years for the global economy to get back to “normal.”

As a result, I won’t avoid dividend stocks altogether.

I would be very selective about what I buy, though.

Here’s to Profits,

Ben Shepherd