In a World of Dividend Cuts, A Large Number of A-REITs are Going Ex on Monday

Summary

• Lower interest rates have left income-savvy investors scrambling for yields, and high dividend-paying companies offer a shelter for income.
• Some of the Australian large-cap businesses are well-known for paying dividends. Global dividend indices have also recognised the dividend paying capabilities of some Australian large-caps.
• A large number of A-REITs are set to go Ex on Monday with distributions.

Dividends and distributions form are an important source of income in the portfolio of investors. Income-savvy investors have been scrambling for yield as monetary policy interest rates, which form the base for other interest rates, are at around the lowest levels.

Even Central Banks are buying bonds to keep the yields lower, among other reasons. With high quality bonds offering extremely low yields or even negative in some cases, the conservative income-savvy investors are finding themselves at the crossroads.

Australian dividend mettle

Investors looking for income-distributing asset classes have been finding shelter at large companies with high dividends pay-outs. In Australia, dividends are perhaps very dear to mum and dad investors. Over the past, Australian large-caps have proven their mettle across the world when it comes to delivering shareholder return through dividends.

WisdomTree Global Dividend Index counts four Australian powerhouses as its constituents. These include Commonwealth Bank of Australia (ASX:CBA) with a dividend yield of 6.22%, Westpac Banking Corporation (ASX:WBC) with a dividend yield of 9.67%, Rio Tinto Limited (ASX:RIO) with a dividend yield of 5.75%, Fortescue Metals Group Limited (ASX:FMG) with a dividend yield of 7.05%, and BHP Group Limited (ASX:BHP) with a dividend yield of 5.91%. (Dividend yield as on 26 June 2020 prices).

At the end of May 2020, LibertyQ Global Dividend Index had 7.47% weighting dedicated to Australian companies. S&P Global Dividend Aristocrats counts five Australian companies as its constituents with a weight of 5.79%.

COVID-19 dividend blues and resurgence

Coronavirus pandemic has jolted investors as well as businesses. A sudden stop to cash flows translated into companies looking to preserve cash and raise capital to sail through the other side of the crisis.

Policymakers in some of the countries also moved with directives for companies to scrap dividend payments. Preserving cash and efficiently navigating the crisis should be prioritised by the company, even if it requires cancelling dividends.

It is also in favour of investors as well – because if companies go belly up, who will pay the dividends? A short-term pain of dividend cancellation will likely outweigh the long-term benefits of preserving cash amidst an extremely uncertain crisis like we are in today.

Australian companies have also cancelled/deferred dividends in the wake of COVID 19 crisis. In February, most of the Australian companies announced dividends, but just one month later, there was a flurry of dividend cancellations/deferrals by the companies.

Nonetheless, there are some companies that have come out of the blue and resumed dividends in less than three months. Harvey Norman Holdings Limited (ASX:HVN) is paying 6 cents per share fully franked special dividend on 29 July 2020.

NRW Holdings Limited (ASX:NWH) had also resolved to pay an interim dividend of 2.5 cents per share on 9 June 2020. It deferred interim dividend payment in March. Shaver Shop Group Limited (ASX:SSG) also cancelled its interim dividend in March. Now, the company is paying 2.1 cents per share special dividend, 80% franked.

A-REITs starts rolling on Monday

As we approach the financial year end, the managed funds/trust/REITs have announced distributions. From a tax perspective, REITs are classified as Managed Investment Trusts (MITs). REITs are not equity shares, but stapled securities that are formed through the combination of two or more entities.

REITs are liable to pay the highest marginal tax on undistributed income or gains, which is why we have so many REITs are going Ex prior to the financial year-end. It is a practice that is being followed by the industry, which is to distribute most or all taxable income of the REIT.