We must look back around 10 years to find the total output of shareholder dividends from UK companies as low as they were in the third quarter of 2020. Indeed, my Foolish colleague Royston Wild pointed out last week that dividends plunged by almost 50% because of the pandemic.
The emerging shareholder dividend opportunity
However, as Roy also mentioned, dividends are starting to come back. We’ve seen the crisis sort out the strong from the weak amongst London-listed companies. You don’t need me to say the lockdowns crushed some sectors, such as transport and hospitality. Others, such as branded consumer goods, IT, technology and online merchants, have been resilient and traded well through the challenges.
And some sectors survived with the help of their own financial resources after the lockdowns initially closed them down. I’m particularly thinking of the housebuilding sector and names such as Persimmon, Vistry, Taylor Wimpey and Bellway. Now those companies are storming back with operations almost up to full speed.
And because of such dynamics, we find ourselves as investors in something of a sweet spot. Indeed, housebuilder share prices remain depressed. But the medium-to-long-term outlook for the sector is as robust as ever. Dividends, earnings and cash flow will likely come surging back in the coming months and years as the economy and the stock market gains traction in the next bull run. Can there be a better time than right now to buy for both capital growth and dividend income?
I think there’s a similar situation in other sectors as well, such as among the surviving retailers. Indeed, internet retailers have traded well through the pandemic, but so have those with traditional bricks-and-mortar retail outlets alongside their internet sales. And there’s a big opportunity for operations on the ground to recover among hybrid retailers, along with earnings and dividends.
Buying in times of economic uncertainty
Other dividend-slashing sectors, such as banking, also have the potential to rebuild their shareholder payments as the economic cycle turns up. And that’s why we’ll often find successful investors such as Warren Buffett loading up with shares in times of uncertainty. Indeed, there’s a greater chance of picking up good value when share prices are depressed. Of course, the ‘outer’ for that value is the recovery and growth in operations that will likely follow.
It’s a well-proven strategy in all areas of business. For example, companies often make their best and most-profitable acquisitions when the economy is flat or shrinking. During downturns like that, other firms can sometimes be found in a financially distressed state and needing to sell more urgently than an acquirer needs to buy. It doesn’t take a genius to work out who is going to get the best deal – the buyer!
It’s also been well-touted advice that the best time to start a new enterprise from scratch is in the middle of a downturn. When the recovery comes, the new business will be lean and fighting fit ready to take advantage of the favourable trading conditions. On top of that, the recession could have reduced the number of competitor companies. And the new business can often get better deals on property rental and capital purchases.
Indeed, if I was building an income portfolio of shares, I’d begin right now while recovery and growth are in the front windscreen and not in the rear-view mirror.
