Do companies increase their dividends the lower the stock price goes?

kinger101

OP.

The dividend yield will tend to go up if the share price falls, as the share price is the denominator in the calculation.  This however assumes a fixed dividend.  To an extent, a company will try to match or beat its prior year dividend, but this often means the dividend cover will be lower.

For example, in 2018, a company valued at £1 per share may have paid out a dividend on 7p per share (based on profits of 14 p per share).  The dividend yield would be 7%, with cover of 2.0.

In 2019, the company may have tanked, and the shares are now valued at 75 p.  They don't want to reduce the dividend, so pay out 7.5 p per share, but from profits of only 9 p per share.  The dividend yield is now 10%, though cover is only 1.2, and the companies profits have almost halved.

In the current climate, I expect many companies will be paying a heavily reduced or no dividend.

MarkCarnage

Thrugelmir said:

george4064 said:

Also with noting that investment trusts can hold cash in reserve to smoothen out dividends whilst funds are not allowed to do that, hence we will see more fluctuation in fund dividends than investment trust dividends.

Reserves are factored into NAV. Cash paid out is going to reduce the value of the underlying investment held. There's no free lunch to be had. 

I don't think anyone was thinking that there would be a 'free lunch'. However, the ability to pay dividends from reserves will be very important for some who are reliant on the income stream. Clearly it can't go on for ever, but it may be that some trusts pay the next one due until it's clearer how long this will last. 

Thrugelmir

MarkCarnage said:

Thrugelmir said:

george4064 said:

Also with noting that investment trusts can hold cash in reserve to smoothen out dividends whilst funds are not allowed to do that, hence we will see more fluctuation in fund dividends than investment trust dividends.

Reserves are factored into NAV. Cash paid out is going to reduce the value of the underlying investment held. There's no free lunch to be had. 

I don't think anyone was thinking that there would be a 'free lunch'. However, the ability to pay dividends from reserves will be very important for some who are reliant on the income stream. Clearly it can't go on for ever, but it may be that some trusts pay the next one due until it's clearer how long this will last. 

No different to selling shares and using the capital. The bulk of dividends paid come from a small pool of companies. 

LobsterMemory

I invest in individual shares rather than funds and one of my exit criteria is if the company stops paying dividends (a cut is OK).
IIRC in 2008/9 I had to churn 6/7 stocks out of 23 for this reason. These were swapped for stocks in the same sector that were still payers. 
Probably resulted in being invested in "safer" higher-cap companies which is not necessarily a bad thing as one gets older.

coyrls

Thrugelmir said:

MarkCarnage said:

Thrugelmir said:

george4064 said:

Also with noting that investment trusts can hold cash in reserve to smoothen out dividends whilst funds are not allowed to do that, hence we will see more fluctuation in fund dividends than investment trust dividends.

Reserves are factored into NAV. Cash paid out is going to reduce the value of the underlying investment held. There's no free lunch to be had. 

I don't think anyone was thinking that there would be a 'free lunch'. However, the ability to pay dividends from reserves will be very important for some who are reliant on the income stream. Clearly it can't go on for ever, but it may be that some trusts pay the next one due until it's clearer how long this will last. 

No different to selling shares and using the capital. The bulk of dividends paid come from a small pool of companies. 

Exactly, these investment trusts essentially offer a manged drawdown behind the scenes.  The mechanisms for providing an income are the same whether you manage your own drawdown income or the investment trusts do it for you.

CreditCardChris

george4064 said:

What you’re looking at is the dividend yield, which is a simple formula of dividend per share/share price. What is happening here is that the dividend is fixed whilst the share price is falling, hence the dividend yield is rising.

I can categorically say that the dividend per share is not rising!

Also with noting that investment trusts can hold cash in reserve to smoothen out dividends whilst funds are not allowed to do that, hence we will see more fluctuation in fund dividends than investment trust dividends.

Got it, thank you.

Audaxer

takesyourchances said:

It will be interesting how many investment trusts will be with dividends following all of this, City of London, Bankers, Scottish American to name a few etc all long records of raising dividends for many decades.

Likes of Murray International and so on, the list is endless really......Then there will be some of the newer trusts etc.I will find out myself in time too as I hold many trusts.

I hold some of these Investment Trusts in my income portfolio. Although the share price has fallen sharply I am hoping that they still keep their long records of increasing dividends. For anyone buying these ITs now, the yields are very good so it does seem a good time to buy. The advantage they have over funds is that ITs have reserves of dividends to cover times like this, whereas funds don't. However if things get even worse, I am not sure how long even these ITs will be able to pay increasing dividends?

takesyourchances

Audaxer said:

takesyourchances said:

It will be interesting how many investment trusts will be with dividends following all of this, City of London, Bankers, Scottish American to name a few etc all long records of raising dividends for many decades.

Likes of Murray International and so on, the list is endless really......Then there will be some of the newer trusts etc.I will find out myself in time too as I hold many trusts.

I hold some of these Investment Trusts in my income portfolio. Although the share price has fallen sharply I am hoping that they still keep their long records of increasing dividends. For anyone buying these ITs now, the yields are very good so it does seem a good time to buy. The advantage they have over funds is that ITs have reserves of dividends to cover times like this, whereas funds don't. However if things get even worse, I am not sure how long even these ITs will be able to pay increasing dividends?

Yes that is what I am hoping for too as I have a spread of IT's and will plan to re-invest the dividends as always at the moment, hopefully they can maintain their long term records. This will certainly be a test this period. I only hold two funds at the moment, the rest are IT's and VLS across my investments. My ISA is filled for this tax year, so I have set my HL direct debit for April for the next tax year to start topping up as normal and I have included City of London, Murray International, Scottish American and Bankers in my buys. I have other income IT's including Asian etc which plan to drip into.

Going forward I will be investing as normal and with the same amounts so making no changes that way and will push through for however long and maintain sensible cash levels for my life needs. Hopefully the IT cash reserves can help smooth the dividends out.

Thrugelmir

Audaxer said:

takesyourchances said:

It will be interesting how many investment trusts will be with dividends following all of this, City of London, Bankers, Scottish American to name a few etc all long records of raising dividends for many decades.

Likes of Murray International and so on, the list is endless really......Then there will be some of the newer trusts etc.I will find out myself in time too as I hold many trusts.

I hold some of these Investment Trusts in my income portfolio. Although the share price has fallen sharply I am hoping that they still keep their long records of increasing dividends. For anyone buying these ITs now, the yields are very good so it does seem a good time to buy. The advantage they have over funds is that ITs have reserves of dividends to cover times like this, whereas funds don't. However if things get even worse, I am not sure how long even these ITs will be able to pay increasing dividends?

CTY had cover of 1.06  as at the end of the last financial year. (30/06/2019)
Companies have been given two weeks grace in releasing their results to the markets. In order that they have time to consider the impact of the virus on their operations. Safe to assume that cash conservation will be a priority for many at the current time. Suspension of share buy backs and dividends cancelled is a certainty. 

Audaxer

Thrugelmir said:

Audaxer said:

takesyourchances said:

It will be interesting how many investment trusts will be with dividends following all of this, City of London, Bankers, Scottish American to name a few etc all long records of raising dividends for many decades.

Likes of Murray International and so on, the list is endless really......Then there will be some of the newer trusts etc.I will find out myself in time too as I hold many trusts.

I hold some of these Investment Trusts in my income portfolio. Although the share price has fallen sharply I am hoping that they still keep their long records of increasing dividends. For anyone buying these ITs now, the yields are very good so it does seem a good time to buy. The advantage they have over funds is that ITs have reserves of dividends to cover times like this, whereas funds don't. However if things get even worse, I am not sure how long even these ITs will be able to pay increasing dividends?

CTY had cover of 1.06  as at the end of the last financial year. (30/06/2019)
Companies have been given two weeks grace in releasing their results to the markets. In order that they have time to consider the impact of the virus on their operations. Safe to assume that cash conservation will be a priority for many at the current time. Suspension of share buy backs and dividends cancelled is a certainty. 

I'm sure some companies will have to cancel dividends, however I would think/hope that ITs and funds that have diversified portfolios of many different company shares, will be able to continue paying dividends as happened in previous equity crashes.