Pension Fund Forum: Dividend pressure
Pension funds could see the dividends earned from equities decrease substantially over the coming months, as companies come under pressure to put corporate security ahead of investor payouts.
Ten years ago, UK pension funds would have fought to keep dividends, but consultants say the pressure is no longer there to fight for the income.
So just what are the implications for pension funds and just how much of an impact of dividend withdrawal for income generation?
With only the larger funds now largely focused on corporate dividends, is the income era over, or has focussed merely shifted in the economic malaise?
We'll be adding comments from pensions funds throughout the week, but if you would like to add your thoughts to this week's Pension Fund Forum, email Julie Henderson via firstname.lastname@example.org.
Peter Kraneveld, said:
"Within listed equity total return, dividend is normally not a dominating item. Dividend is also a very short-term consideration that does not fit into pension strategy. Therefore, it plays a role only on the trading floors of pension funds who manage their own investments.
"There are two ways to play dividend. The most obvious is to take advantage of the fact that paying dividend will cause a dip in the price of the stock. If the company is sound and stable, you can sometimes buy just after dividend has been paid, wait for the price of the stock to return to its "normal" level and sell again with a profit, higher then dividend. Of course, if you are holding the stock, you can play the same game by selling just before dividend payment and buying back ex-dividend. The other tactic applies in times when you think an equity index will be flat for some time. You then build a portfolio of high dividend yield equity in order to maximize your total return.
"If dividend levels fall, the 'riding the dividend dip' tactic will still work, but yield less, so you may stop doing it for reasons of transaction cost. The 'selecting high dividend stock' tactic will not be affected, but if dividend doesn't fall across the board, it may change the portfolio, since it is the relative dividend level that counts. On a strategic level, falling dividend is irrelevant, only total return counts."