Many of us were happy to see the back of 2020. After bushfires were replaced by COVID-19 we then endured a long year of uncertainty and disruption. While the financial markets were hit hard early, they bounced back quickly. Unfortunately, the reality of persistent low income proved more stubborn to shift. Thankfully, some positive global news on several fronts in late 2020 has 2021 looking a bit brighter.
In Perpetual Private’s quarterly investment report for September to December 2020 we dig deeper into the performance of the Australian and global economy and examine the issues likely to affect economic performance, income and dividends in 2021.
Continued positive news about vaccine efficacy late in 2020, as well as the sight of vaccines starting to roll out in wealthier countries, was very welcome news. The eventual peaceful transition to a Biden Presidency was also heartening. It gave certainty to markets and was warmly received by much of the international community which is hopeful that it will provide a boost to international relations and the global economy.
The continued efforts of central banks and government around the world to do ‘whatever it takes’ to stimulate their economies is accelerating the economic recovery. The US passed a new economic stimulus package and President Joe Biden also signed a flurry of executive orders relating to COVID-19, international relations and investment in the ‘green’ economy. Other countries are implementing similar stimulus measures.
Interest rates likely to remain low, but not go lower
When COVID-19 hit, interest rates in Australia and globally were already very low. In response, central banks lowered interest rates even further, to try to stimulate their economies. At its November 2020 meeting, the Reserve Bank of Australia (RBA) cut the cash rate to an historic low of 0.1%. These persistent low interest rates have continued to reduce the return on many lower risk investments (like cash, bonds etc), making life difficult for those living on income from savings and investments.
While the RBA says it intends to keep rates on hold for at least the next three years, it has also consistently said it doesn’t intend to take interest rates negative. So, while we’re not likely to see a return to higher interest rates for some time, at least we are not likely to see a further reduction in income due to even lower interest rates.
Dividends likely to increase
One of the biggest hits to income for beneficiaries in Australia in 2020 was the reduction in dividends paid by publicly listed companies. Companies tend to pay dividends when they are comfortable with their financial position and so are happy to pay out dividends (part of their profits) rather than retain this money in their companies for other uses. With the economic uncertainty created by COVID, many companies reacted cautiously and prudently and held onto more cash as an insurance against the future. This meant they did not pay dividends or paid reduced dividends.
Australian banks in particular paid lower dividends in 2020, causing the incomes of many trust beneficiaries and retirees to suffer. These banks tend to pay quite large dividends and also make up a significant percentage of many investment portfolios. APRA restricted the size of dividends Australian banks could pay in 2020, first by strongly recommending banks did not pay dividends, then in July restricting banks’ dividend payments to 50% of profits. In December 2020, APRA removed these restrictions, making banks more likely to increase dividend payments again.
Income expectations for 2021
While there are positive signs of economic recovery, things remain fragile. Many countries are still recording very high daily levels of COVID infections and deaths and new lockdowns or problems with vaccinations will hamper the recovery. The way governments manage the withdrawal of their economic stimulus will be critical. If they withdraw fiscal spending too soon economies will suffer, yet the longer they continue increased spending the greater the debt will be in years to come.
Overall, we expect income in 2021 to be higher than 2020, but not yet back to the same level as in 2019.
As in previous years, income will fluctuate throughout the year. Much of this is due to the way investments are paid out. Dividends, which currently make up a high percentage of the income generated by many portfolios, are generally paid out twice a year in Australia. This is most commonly around September (after the end of financial year results) and around March (after the mid-year interim results). The September dividends tend to be larger than the March dividends.
Reporting season for many large Australian companies is starting soon, so we will have a good idea of their intentions for dividends within the coming month.
TAKE YOUR FIRST STEP - CONTACT US ON 1800 631 381
Now more than ever is the time to seek quality financial advice to ensure you plan well through 2021 and beyond. Call us on 1800 631 381.