Thursday, May 28, 2020

Covid-19 Cuts

The stock market somewhat recovered from the carnage it experienced in late February and March. After the S&P 500 closed at a record high of 3,386.15 on 19 February 2020, the index dropped as low as 2,191.86 (about 35%) before making its comeback. Today, the S&P 500 is trading above 3,000 again!

While my DivGro portfolio also recovered nicely, I've suffered some dividend cuts and suspensions in May.

Walt Disney (DIS) decided to forgo its first semi-annual dividend payment and one of my funds, Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO), cut its distribution by 21%. Unfortunately, two more DivGro holdings announced suspensions of their dividends last week.

In this article, I will share my current thinking about these cuts and suspensions and the actions I'm likely to take.

Covid-19's Impact

I can't help but think the stock market is suffering from irrational exuberance.

The impact of the Covid-19 pandemic on the Global and US Economy most likely will be long-term. Some job losses will be structural, meaning they won't come back. And the massive US stimulus package will increase the already high fiscal deficit. At the same time, the US GDP is expected to contract by 5.9% in 2020, which would increase the debt-to-GDP ratio above already record-high levels. In fact, US debt now is projected to exceed the size of the economy in 2020.

Many dividend-paying companies are trying to deal with the challenges posed by this pandemic. Some companies will suspend their dividends, some will cut their dividends, and some will freeze their dividends. Taking any of these actions will likely result in the stock taking a beating as dividend investors react to the news. In particular, income investors would need to replace their lost income or live with the reduced income. Some dividend growth [DG] investors may divest on the news.

Or not.

Perhaps dividend investors will see this pandemic and its impact for the black swan event it is, and decide to wait things out.

Of course, there are DG stocks that will just keep on giving and growing, and those are the kinds of stocks any DG investor would love to own!

At the end of this article, I provide a list of DG stocks that have already suspended or cut their dividends. As a consequence, these stocks will lose their dividend streaks (5 years or more of higher dividend payments) and be removed from Dividend Radar and the Dividend Champions lists.

The Impact on DivGro

ETO is a closed-end fund with a monthly distribution. My cost basis is $17.95 per unit and the initial Yield on Cost (YoC) is 12.03%. ETO closed at $20.23 per unit on Tuesday, 26 May. Including dividends, my ETO position has unrealized gains of 12.2%.

Given ETO's current yield of 8.56% and the fact that I have unrealized gains, closing or reducing my position doesn't make much sense to me. Where will I find a replacement for that yield?

ETO's dividend cut reduced DivGro's projected annual dividend income by $270.

DIS decided to forgo its first semi-annual dividend payment of 78¢ per share. Since I own 200 shares, that's at least $156 of dividend income I won't be receiving from DIS in 2020. Unless things improve dramatically, I don't think DIS will pay the second semi-annual dividend payment either. 

My cost basis is $99.20 and DIS closed at $118.02 per share on Tuesday, 26 May. That represents an annualized total return (including dividends) of about 6%.

I'll wait and see what DIS does about the second semi-annual dividend. For now, I'm handling DIS as a stock with a suspended dividend and I reduced DivGro's PADI by $352.

Last week, two more DivGro positions were impacted, ROST, and TJX.

On 20 May, Ross Stores, Inc (ROSTsuspended its dividend, reducing DivGro's PADI by $114.

My average cost basis is $86.18, whereas ROST closed at $94.60 per share on Tuesday, 26 May. Including dividends, that represents unrealized gains of 11%, or about 6% on an annualized basis.

ROST is a low-yielding DG stock with a dividend streak of 26 years. My interest in ROST is (was) mainly for its growth prospects, which now seem to severely impacted. I'll see how things develop towards the end of 2020 and decide what to do with my position by year's end. 

The TJX Companies, Inc (TJX) suspended its dividend on 21 May, so reducing DivGro's PADI by $184.

My average cost basis is $44.21, whereas TJX closed at $55.30 per share on Tuesday, 26 May. Including dividends, my TJX position has unrealized gains of 24%, or about 14% on an annualized basis. 

Again, with unrealized gains of 24%, I'll see how things develop in 2020 and decide what to do by the end of the year. 

My Plans, Summarized

Generally, I will sell all my shares in a position after a dividend cut (or suspension). If the dividend is frozen rather than cut, I may decide to hold onto my shares, depending on circumstances.

But I've decided not to take any immediate action. Instead, I'll wait to see how things develop. If the stock market continues to defy logic, I'll hold onto my positions through the end of 2020 and then determine if selling one or more positions would be sensible.

In case the market becomes more rational and takes a tumble, I'll close one or more positions and reinvest the returns in high-quality DG stocks that trade well below fair value.

Dividend Cuts and Suspension, so far...

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  1. Good analysis. Yeah, there are tough decisions ahead for dividend investors for the short term and long term.

    1. Thanks for commenting -- we'll need to see what happens next. I think the deteriorating US-China relationship may push the markets down again...


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