Retirees who have lived off a steady stream of share dividends have seen their income plunge as banks cancel payouts, and they face more financial pain in coming months when research shows more companies are likely to slash their distributions because of the coronavirus crisis.
Those who believe the damage wrought to their share portfolios means they now qualify for a part-pension have been having trouble dealing with a Centrelink system already struggling with waves of the freshly unemployed, the Association of Independent Retirees says.
Dividends have historically been responsible for about 60% of the income reaped from investing in the Australian sharemarket, according to research by Realindex, a division of First Sentier Investors.
But, under pressure from the prudential regulator, three of the big four banks have deferred or slashed their previously lucrative dividends, and investors expect Australia’s biggest bank, the Commonwealth, will follow suit after cutting the value of its assets by $1.5bn last week due to the pandemic.
The Australian Prudential Regulation Authority has also called on insurers and other institutions it regulates to cut or defer dividends.
And Realindex’s research also shows that analysts expect companies in sectors including energy, transport and consumer services will also cut their payouts to shareholders as the economic effects of shutting down whole industries to crimp the spread of the virus become clear.
Wayne Strandquist, the president of Air, said retirees who invested in commercial or residential property were also taking a hit due to tumbling rents.
“They’re struggling to find a reliable source of income,” he said.
“They might have a lot of assets on paper but they’re not making anything.”
He said that before the crisis self-funded retirees were attracted to bank stocks because they paid high dividends that were fully franked, meaning tax had already been paid at the corporate rate of 30%.
Because of this tax benefit bank stocks paid effective returns of 10% to 11%, rates that were “impossible to get elsewhere”, Strandquist said.
He said bank stocks seemed particularly attractive at a time when term deposit rates were at record lows.
“There were a number of commentators saying, ‘Don’t put your money in the bank, buy shares in the bank,’” he said.
“They treated it almost as an annuity.”
He said retirees now feared for the returns from other high-yield stocks, especially in the infrastructure sector, that they had treated as an alternative to buying bonds.
“A lot of the bond proxies, Sydney Airport, Transurban, they’ve been smashed,” he said.
He said retirees who thought the fall in their assets due to a sharemarket rout that wiped about 30% from stock prices meant they would be eligible for a part-pension were having difficulty dealing with Centrelink.
Some were put off by the queues of “hundreds and hundreds” of people outside Centrelink offices, he said.
“What 75-year-old would want to deal with that?” he said.
“From go to whoa it takes months to inventory all their assets, talk to their accountants, and then there’s a delay in processing from Centrelink.
“The pension can’t make up for the 40% drop in dividends they’ve seen.”
The executive chairman of fund manager Ausbil, Paul Xiradis, said travel, casinos, retail shopping and energy companies were at the highest risk of needing to cut dividends.
“With a medium risk of reduced dividends are companies in the financials (ex-banks), metals, discretionary health care and building industries,” he said.
“We consider food retailing, telecommunications, pharmaceuticals (especially CSL), agriculture, technology, regulated utilities, iron ore and gold producers to have a relatively low risk of dividend reductions.”
Realindex’s head of investments, David Walsh, said there was no doubt dividends across the market would be lower in the future, dragging down overall returns.
“The impact will be noticeable,” he said.
He said dwindling dividends had also forced Realindex and other big-end-of-town investors to think about how they valued companies.
“It’s certainly going to have an impact on how investment managers – and we – work,” he said.