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Published: 3rd April 2020 (5 Min Read)

These are worrying times for people who are dependent upon income from their savings and investments. After years of receiving very little interest from their bank accounts, they are now hearing daily about companies deferring decisions on, delaying, reducing or simply not paying dividends.

The nature of the economic shutdown being imposed globally means that companies find it very difficult to predict what their cash flows will be, and thus this precautionary behaviour is entirely reasonable, but that doesn’t help mitigate the practical concerns of investors who need income.

What I suggest is that you ask yourself or your investment manager whether your portfolio looks reasonably constructed for these circumstances, and I suggest the following questions:

  1. Is my portfolio well diversified? In addition to company dividends, do I receive income from other assets such as bonds, infrastructure or stable property assets, which may have either direct or indirect government support, or be protected by strong finances?
  2. Is my dividend income simply representative of the economy as a whole, or is it less exposed to sectors, such as banks and insurers or retailers and automobile manufacturers, which my investment manager prefers to avoid if possible?
  3. Does my investment manager look for “quality”, well-financed, investment opportunities, which gives me more than average exposure to companies which have strong cash flows under normal circumstances, and which longer term may benefit from the current disruption?
  4. Do I own investment trusts in my portfolio? If I do, then the risk of my dividend being cut may be reduced by the conservative policies of the trust’s Board, who may have been building up reserves for a rainy day like today.

If the answers to these questions are broadly, “yes”, then although your investment income may well fall in the immediate future, it is likely to fall less than it might otherwise have done.

We don’t know how long this global economic hiatus will last, but it is also likely that the income generated from such a portfolio will recover relatively quickly when it does.

Therefore, if we expect that perhaps economic recovery will start in the second half of the year, the reduction in your income may last months, rather than for a longer period, before recovering.

If that is a reasonable assumption, and you are currently unable to drive far, go on holiday, eat out, visit the theatre or cinema, attend sports events or even play golf, then your expenditure may also fall for a while. Your electricity bill may go up if you are using the internet more than normal, but otherwise the demands on your income may fall temporarily.

It is important not to panic, because we have always tried to bring some relative resilience to the investments in your portfolio. We have a high degree of confidence that the portfolio and its income will recover in time, but we cannot say when.

In the meantime, you may wish to ask your investment manager to increase the level of cash in the portfolio slightly, if he has not already done so. On the one hand it will enable the potential to pay out some capital to meet your income needs in these difficult times, while on the other hand if you don’t need it there may be some bargains to be found when the situation improves.

Article written by
Simon James