Tag Archives: Cashflow

Dividend cuts – what can investors expect?

By visual /May 13,2020/

Since the financial crisis more than a decade ago, investors have had to search much harder for income as savings rates have plunged.

Many have looked to the equity market to help them achieve better income returns, with large numbers of companies increasing dividend payments to shareholders as they have grown.

It is likely that equities will continue to provide a relatively attractive source of income for those comfortable with the risks of investing in the stock market. However, regrettably, dividend payments for most equity income investors are likely to be lower than in previous years for the foreseeable future as a result of the coronavirus crisis.

Here we explain why and give our views on the outlook for dividend payments over the medium and longer term.

The equity income fund model

Equity funds that have a focus on investing for income as well as the potential for capital growth are called equity income funds.

A dividend is an income payment from an investment. The dividends that investors receive from an equity income fund directly reflect the dividends received from companies that the fund holds shares in. This money is paid out to unit or shareholders in proportion to the size of their holdings.

One aim in managing an equity income fund can be to increase dividend payments to investors over time. A manager may aim to achieve this through focusing investment on successful businesses that have the potential to increase their dividend payments as they increase their profits. The income and capital value of an equity income fund can go down as well as up and investors may not get back the amount they invest.

How the coronavirus crisis has impacted companies’ dividend plans

The coronavirus crisis has blown the carefully laid plans of large numbers of companies around the world way off course.

For the time being, the revenue streams of many good businesses have been drastically reduced. And for some, in the most exposed sectors, they have effectively evaporated. All the while, there are costs that must still be met alongside obligations towards key stakeholders including employees, customers and suppliers.

As in any crisis, there are exceptions – some supermarkets, for example, have experienced a surge in sales during the lockdown period – but the management of a great many companies now have a single overriding focus: navigating their way through the current unprecedented conditions as best they can.

It should therefore come as no surprise that many companies have announced that they are reducing their dividend payments or in some cases, suspending them entirely. In most cases we believe this should be welcomed in the short term as it will provide necessary funds to shore up businesses, helping them to ensure their long-term viability once the immediate crisis has passed.

We expect to see more companies follow suit over the coming months, with many likely to err on the side of caution in setting their dividend policies, given the high degree of uncertainty we are all living with.

Companies that have been forced to accept Government assistance will find it difficult to continue paying dividends.  And in some countries, banks have been instructed not to pay to a dividend to preserve capital so that they can provide finance to companies that need it.

The knock-on impact on equity income funds

When investing in equities for income you are left with a choice between trying to maintain the level of your dividend income or accepting that it will fall.

Importantly, this does not have to mean abandoning an aim to grow your income over the long-term. This can sensibly remain a key consideration in your stock selection. Instead you may wish to consider each company on an individual basis, assessing how well they are positioned to come through the crisis without fundamental changes to their long-term business case, which will impact their ability to pay dividends going forward.

An insistence on maintaining the dividend of an equity income fund in the current environment would, in most cases, force you into investing in a narrow, less diversified range of stocks. Accepting a cut in the dividend on the other hand can allow you to maintain a focus on investing in the companies that are most likely to help you achieve your long-term objectives in both income and growth terms.

Bouncing back following a crisis

In the wake of crisis situations, companies that have cut their dividends to prioritise cash holdings that enable them to operate and trade effectively can often recover faster than those that have blindly pursued the maintenance of dividend targets set in a completely different environment.

When the economic environment improves, these companies have the potential to restore and grow their dividends again from a position of comparative strength. A look at past crises shows that the overall impact on the intrinsic value of a business from a temporary dividend cut is generally small and, for long-term investors, it is important not to lose track of that fact amid the short-term market noise.

The outlook for dividends and equity income investors over the medium and long term

The shape of the recovery from the coronavirus crisis remains far from clear. There are indications that the strict lockdown conditions in place in many countries could be relaxed reasonably soon, enabling some limited activity to resume.

Realistically however, we all face a long wait for anything approximating ‘business as normal’ to resume, given that the only route to achieving this appears to be the development and implementation of an effective vaccination programme on a global scale.

This is unlikely to come together until well into next year, even if one of the vaccines that have already begun human trials proves effective.

This means that dividend payments over the next three years or so are likely to remain well below levels seen in 2019. There is no precedent for the current crisis but estimates of the eventual cut in dividends for the UK market as a whole in 2020 have so far ranged from around 25% to as high as 50%.

Longer term, a return to ‘business as normal’ for the economy is likely to lead to a return to ‘business as normal’ for dividends and by extension equity income funds.

It is possible that we could begin to see more companies around the world adopt more conservative dividend policies along the lines of Asian businesses. However, the aftermath of past crises would suggest that while companies may change their behaviour for a couple of years, they often then revert to the way that things were before.

Source: Schroders.

How to reduce spending after a job loss

By Robert Wright /May 08,2020/

How to reduce expenses after a job loss and get back in the driver’s seat of your finances.

With many thousands of Australians experiencing job losses and reduced hours as a result of the COVID-19 (coronavirus) pandemic, many will need to take a look at their expenses to continue living within their means.

The average Australian household spends almost $75,000 each year on living expenses, excluding major expenses such as rent or insurance. That adds up to between $1,100 and $1,700 per household each week that’s spent on personal care, pampering our pets, transport, alcohol, fashion and more.

The good news is that there are some simple ways to cut back on these expenses. Whether you need to slash your costs significantly or simply tighten up your spending after a job loss, here’s where to start.

1. Know where you’re spending money

The first step is to evaluate where your finances stand today. If you already have a working budget, use it as a starting point, but expect that you may need to make some adjustments if your financial circumstances have changed. Itemise your monthly expenses as much as possible and separate out essential needs like housing, food and utilities, versus “wants” like entertainment, takeaway meals or online shopping. This will help you to see where you can realistically cut back, find cheaper alternatives and help save extra money.

2. Cut back housing expenses

When you need to make immediate changes to your budget, starting with the largest targets can have a big impact. For many of us, this means housing costs – either a mortgage or rental payments, as approximately 20% of Australians’ gross household income is spent on housing. If you’re paying off your home, many banks are offering “mortgage holidays” to clients experiencing financial challenges.

If you’re ahead on your repayments, there may be other options, including reducing repayments or using your offset or redraw facilities to get access to additional money. You might also consider temporarily switching from a principal-and-interest mortgage, to one that’s interest-only.

Paying off only the interest will instantly reduce your repayment amount. However, it may also take you longer to pay off the mortgage as a whole. Speak to your financial adviser or lender to discuss which options are right for your circumstances.

If you rent and have been impacted financially you may seek a rental reduction. The Australian government has agreed to a six-month moratorium on at least some evictions. The Tenants’ Union is posting up-to-date information about landlord obligations during this crisis, as well as pointers for how to negotiate with your landlord.

3. Save money on your phone and internet

Next, cast a ruthless eye over regular utilities like phone and internet bills. Many telco companies make it easy to bundle all your devices into a single plan, which can work out cheaper in the long run. If you and your family have separate mobile and data plans with different providers, look at whether consolidating them can help you save.

On the other hand, you might find you’re still paying for old devices that are attached to a bundled plan. Take a close look at all your plan inclusions and get rid of any phones or tablets that are sitting unused in a drawer.

You may also discover that you can get by with less data on certain devices, because you’re using them through your home network rather than being out and about. If you’re out of contract, talk to your telco about how much you can save by cutting back on your wireless data.

4. Trim the costs on food

Until recently, Australians were spending around $11.7 billion a year at restaurants and $10.6 billion on takeaways. While you’re probably not eating out right now, takeaway food can still make a hole in your budget, so use the extra time at home as an opportunity to get into the kitchen.

Take a savvy approach to home cooking by adding more vegetables and legumes to your diet, and staying away from expensive cuts of meat. Avoid shopping at the grocery store when you’re hungry, buy home-brand products where possible and always take a shopping list. Try cooking bigger batches of food so you have enough for a couple of meals, without doubling the cost (and always eat the leftovers). Be mindful of waste at home, the average Australian household throws away almost 300kg of food per person each year.

5. Find value in your lifestyle

Now is an opportunity to consider what you value most. By looking closely at your current spending, you’ll probably find ongoing monthly payments for expenses that are really not important to your household: music lessons for a child who hates the instrument; subscriptions to publications no one’s regularly reading; apps and software that are on auto-renew payment.

More than 14.5 million Australians – that’s over half of us – have at least one pay TV subscription in their home. If you still keep returning to free-to-air, it’s time to reassess. Cutting out things you don’t use or value is painless and gives you extra money that you can better use elsewhere.

There will also be areas where you can get the same value for less money. You hold a gym membership to be healthy, but while they’re no-go zones, freeze your membership payments and look for inexpensive or free at-home workouts instead. The same applies to beauty treatments like hair colouring and manicures, which can be done at home.

6. Forego any guilty pleasures

In tough times, it can be tempting to find solace in an occasional treat or guilty pleasure. But when you look at the expense, those seemingly cheap thrills could be costing you a lot of money. For example, Australians spend $14.9 billion each year on alcohol and $21.5 billion on clothing and shoes.

Be honest about where you’re most likely to splurge and remove any triggers like email newsletters (hit unsubscribe) or social media (unfollow those too-tempting accounts).

 

 

Source: AMP

Where to seek advice in uncertain times

By Robert Wright /April 14,2020/

With the ongoing escalation of the COVID-19 crisis many people are struggling. Huge changes are happening and we’re all being affected, socially, emotionally and financially.
If your ability to work and earn an income has already been affected, you’re likely to be worried about how you’re going to cover your bills and mortgage and pay for the essentials your family need.

Take care of the present first
Depending on your life stage, you may also have slightly longer term – but still important –financial concerns on your mind.

If you’re close to retirement, you may be anxiously watching how your superannuation balance has been affected by volatile financial markets. If you’ve saved a deposit and have been house hunting, perhaps you’re wondering if now is the right time to buy.

Your long-term goals and strategies can only be built on strong financial foundations. If you can maintain a strict budget and really rein in your cash flow for the duration of this extraordinary period of uncertainty, then you’ll be preserving that stability you need to make methodical progress towards your goals when we all come out the other side of this crisis.

Review your budget and strip out as many non-essentials as you possibly can. Look at deferring your mortgage repayments for three months or asking your landlord to take rent payments out of your bond. Talk to your credit card, mobile phone and utilities providers and see what you can negotiate.

These steps can help you hold onto any cash you have saved for longer. Not only does this give you a greater sense of security, it can turn those savings into enough to last you for months instead of weeks.

It’s now even more important to feel confident in the choices you’re making about money. Getting advice and taking action on your finances can help you experience less stress as things keep changing from day to day. When so many other things seem to be spiralling out of control, you can make a difference to your state of mind by being realistic about what you can change, and what you can’t.

There is no other time when professional advice is more valuable than it is now. So if you have a financial planner, talk to them. Ask them whether now is the right time to go ahead with that property you’re buying or how to manage your retirement plan if your investments have taken a hit. And if you don’t have that professional support, make sure you’re doing lots of research and thinking things through.

Source: FPA Money & Life

Make Australia save again

By Robert Wright /September 02,2019/

Are you one of the 20 per cent of Australians with less than $250 in their savings account?

Recent research from AMP Bank has found that one in five Australians isn’t saving any of their monthly income.

And we’re all different when it comes to saving. People in Tasmania and Western Australia have the least amount of savings, while men on average have nearly 20 per cent more money saved than women. Unsurprisingly, young people (those aged 18 to 24 years old) have the lowest savings balances with nearly a third having less than $250 in a savings account.

Why are we saving so little?

With low wage growth and the cost of living increasing, it seems Australians’ savings habits are changing.  AMP Bank’s research found that people’s wages are mostly used for everyday living costs and bills, while other costs such as school and day care fees were also called out as factors preventing people from saving.

Another reason people aren’t saving is that they’re actually paying down debts, such as their home loan, faster, due to our record low interest rates.

But we need to save to make sure our financial wellbeing is taken care of. As AMP Bank CEO Sally Bruce points out, “For most Australians, having a pot of money to use when times are tough or to fund the nicer things in life such as a new home or a holiday can have a huge impact on health and morale as well as your wallet.”

Saving for holidays and rainy days

Saving is an important part of our finances. It gives us a safety net when we need it or allows us to have enough money to afford the big things.

According to the moneysmart website, the top three savings goals of Australians are:

• Holidays. Whether close to home or on the other side of the world, a holiday is what a record 53% of people indicated they are saving for.
• Rainy day fund. 46% of people nominated a rainy day fund, or emergency fund, as their top priority for savings.
• Buy or renovate a home. The dream of owning property is still a goal for most Australians, with 40% of people saving to buy a home or renovate.

So what steps can we take to start saving?

• Find the right savings account to suit your needs. There are many different savings accounts available to you. Online savings accounts and term deposits could offer higher interest rates than a typical transactional account.
• Set a savings goal. Identifying your savings goal is the first step in creating good financial habits, plus you’ll know exactly how much you need and when you need it by so you can commit to reaching your goal.
• Work out where the money will come from. For most people, this might be the money left over from their pay after they’ve covered all their bills and expenses each month. You could also think about getting a side gig for extra income, or cutting back on spending to free up more money.
• Set up a regular savings plan. Once you’ve identified your savings goals, you’ll need to work out the best method of saving for you. The way you save might differ depending on whether your saving goals are long term or short term. For example, a separate savings account where your money is readily accessible might be useful for a short-term goal. A term deposit, where your money is tied up for a set period of time in return for higher interest, might be more suitable for a longer-term goal.

Make sure you’re getting the most out of your savings account

According to the research, more than a quarter (26%) of Australians currently don’t have a savings account. Of those who do, nearly half (43%) don’t know their interest rate.

As Ms Bruce explains, “The more we can encourage Australians to take an interest in interest, the more they will be able to grow their wealth and reduce the impact of unexpected costs or afford the extra things in life they want.”

So, when looking for a savings account, some important features to consider are:

• Does it offer attractive interest rates?
• What fees might I be charged?
• How do I access my money?
• Is there a minimum or maximum amount of funds allowed in the account?
• Will my savings be secure with the financial institution I choose?
• Read more about choosing the right savings account for you.

Saving is an important part of your financial success. Making small changes to build that safety net could help to improve your financial situation.

Source: AMP, June 2019