- The Australian Prudential Regulation Authority (APRA) introduced dividend restrictions on the banking sector amid the pandemic.
- A significant proportion of Australian companies either slashed or deferred dividend payments.
- The Australian economy getting back on track is a positive sign for the dividend landscape.
The restrictions imposed to stall coronavirus’ massive transmission across the globe opened a can of worms for the business landscape. The restrictions triggered a dramatic decline in operations amid the pandemic. The repercussions were innumerable, stretching from the drop in revenues to an increased threat of survival while many companies slashed dividend to reserve liquidity.
Although the action helped the companies save significant amount of capital, it was a bolt out of the blue for the dividend investors. Notably, Australian companies have been a hot ticket for years, owing to the significant proportion of dividend they offer to the investors. The sudden cutback in income source, especially when health scenario was a wreck, eroded the ‘dividend-philic’ sentiments of many.
To make the matter worse, the financial downturns exacerbated by job losses dealt another crushing blow to the stockholders. Nevertheless, the Australian economy is starting to look up and the improvement in job scenario and consumer sentiments has been a positive sign, not only for business settings but also for that chunk of additional income that dividend investors look for.
In this backdrop, let us look at 2020’s dividend landscape of Australia.
Capping of Bank’s Dividend
The dividend income from Australian banks has been a pivotal element of many investors’ conservative strategy, who seek to manage their living costs through additional revenue stream without disturbing the underlying capital. However, the pandemic scenario and the associated uncertainties have affected the regulatory settings for the distribution of dividends.
APRA’s diktat to banks on prudent capital management capped dividend payments initially, wherein the dividend outflows were either deferred or offset to a considerable extent in order to maintain buffer. The focus was primarily on supporting the economy in times of crisis.
Nevertheless, with the improving scenario, the APRA guidance was updated in July-end, thereby easing restrictions on dividend payment. Thus, the banking sector was then required to maintain at least half of their earnings before making dividend-related decisions.
However, the outlook showing a significant upturn, has been typically encouraging for dividend income as APRA has removed limits on bank’s dividends. The decision to remove restrictions came in December, with the changes in the regulatory setting effective from 1 January 2021.
Big Four Bank’s dividend. Source: ASX
Other Companies following Similar Cost-Saving Routes
While dividend limits predominantly capped dividend income from the banking sector, many other companies followed suit in order to maintain cash amid unprecedented times. Notably, dividend investing has gained massive popularity among Australian investors owing to its tax benefit. The dividends are not double taxed in Australia and the investors can enjoy tax benefit of the franked dividends.
However, the crisis ruptured the ideal dividend environment in Australia as around one-third of the Australian companies decided not to pay the dividend. It has affected the dividend yields of many, given their share price was able to bounce back from the bottom-mark.
A Dilemma about the Conservative Strategy
The pandemic managed to expose the risk associated with what was once regarded as one of the safest investment strategies. Over the years, investors’ hunt for high-dividend yield stocks has grown significantly, especially allowing self-funded retirees to receive a consistent flow of income. While the dividend investment strategy may consider the general underlying scenario, nevertheless, encapsulating risk-consideration of a catastrophe of this magnitude is highly unlikely. Since the pandemic is far from over, the prudent investment could involve a mix of diversification and value investment, with the focus on the current volatile scenario.