By EWN • 03 September 2021 • 10:19
The worldwide coronavirus pandemic has had far-reaching effects on every aspect of life as we know it. Businesses everywhere have had to contend with the ravages of the COVID-19 storm. Some organizations that engage in dividend-paying activities have had to decrease their shareholders’ payouts. If these organizations did not reduce their dividends, they would not have survived the virus’ ill effects.
However, things are now changing for the good. Firms are reengaging in a lot of pre-pandemic practices, including paying out dividends to their stakeholders. Most financial analysts are pleasantly surprised by the resultant dividend growth rate.
Before considering the prospects of dividend-paying companies during this pandemic, it is worth understanding what dividends bring to the financial table.
When an organization operates well in the marketplace, profitably providing goods and services to its customers, it earns enough money to repay its investors. Companies give their investors payments known as dividends – rewards for believing in the enterprise’s ability to make a profit. Paying out dividends signals the health status of a company. Making dividend payments shows that a company has a sizable cash flow. A healthy, thriving organization is well-positioned to give out dividends.
In addition to catering to investors, dividends are valuable for the much-needed tax breaks that they provide. UK stocks and shares ISAs are a tax-free way to hold dividend payouts. Using such accounts also helps those who wish to practice financial prudence. Diversification of investment portfolios is achieved when stocks and shares ISAs are involved. Stocks and shares ISAs are a foolproof way to decrease the volatility ordinarily associated with the investment process.
Dividends not only bolster wise fiscal habits. They can also be a crutch for organizations going through challenging times, such as a global pandemic. Companies struggling to stay afloat can often rely on their dividends to see them through the rough patches.
Although dividends have many advantages, there is a caveat to be observed. Just because some companies can afford to pay out dividends does not mean that all dividend-paying companies will have enough revenue to pay their investors. There is simply no guarantee in this regard. It is more likely that investors will receive a portion of their investment, not the whole amount.
Unforeseen circumstances like the recent pandemic make the issuing out of dividends a sensitive business strategy. Fear of the coronavirus’ highly contagious nature forced many companies to drastically reduce employee hours. In some cases, employees were put on indefinite leave or even fired from their positions. Management teams need to carefully consider whether it would be a good idea to furnish investors with dividend payouts. A company’s image – and future profits – could be tarnished by ill-advised decisions. Rewarding investors while employees receive poor compensation would be such a decision.
Dividends are also valuable when it comes to managing the management team itself. Utilizing a dividend-payout structure prevents companies from overcompensating their C-level executives. Paying dividends allows a company to make wiser and more efficient business decisions.
Some companies responded to the challenges wrought by the pandemic in thoughtful ways. Instead of withholding dividends altogether, some dividend-paying companies chose to delay their investors’ payouts. In a bid to save money, other companies made the sensible move of cutting down their dividend payouts.
Janus Henderson Investors found that the pandemic had fewer ill effects on businesses than anticipated. All over the world, 84% of companies reported higher dividends. The recent increase in commodity prices has benefited the mining sector, for example. Nestle was the biggest payer of dividends. Samsung has now outdone Nestle in terms of dividend payouts.
Though this pattern bodes well for organizational operations, the pandemic effects on dividend payouts are unequal. Not every sector of the economy will improve within 12 months as hoped.
Yet, this has not dampened the hope that analysts hold out for the financial services sector. It is the sector most likely to recover soonest from the negative consequences of the coronavirus. A vigorous system supports the operations of the financial services sector. It has the additional advantage of being incredibly liquid. As such, it is no surprise that most European business dividend payouts came from the banking area of the finance sector.
Compared to the global economic fiasco of 2008, there is more reason for hope during this trying period induced by the pandemic. A decade ago, faulty banking structures shook the markets. But now, governments are actively supporting the financial industry. For Jane Shoemake from Janus Henderson Investors, this is good news as it means the post-pandemic recovery will be unhindered by poor banking infrastructure.
Most economies around the world are currently enjoying a measure of post-coronavirus recovery. Government support in the form of free vaccinations is a major contributing factor to this trend. Having a healthy, vaccinated workforce means industries can begin to work again and make profits again.
Like everyone else, investors have had to patiently wait out the negative effects of the pandemic. They have waited for dividend income as companies strategized about the best way forward in the New Normal. It is encouraging to see the budding signs of global economic recovery. As banks and other financial institutions continue to exercise caution and are supported by governments and policymakers, there is no reason why dividends should not reach their pre-pandemic levels in record time.
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