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Economic shutdowns in response to Covid-19 have forced companies to preserve cash by any means available, which is bad news for dividend investors.

A report from Capital Group said dividend cuts and suspensions have jumped to the highest level in more than a decade. This is hitting investors who rely on dividend income at a time when ultra-low interest rates are keeping bond yields low.

Dividends are often cut during periods of financial stress, as companies look to save money and some governments impose restrictions. The Liberal government’s aid for large companies announced this week placed limits on dividends, for example, and the report said European banks are facing political pressure to preserve capital.

Several firms in Canada’s oil patch have suspended their dividends, including Cenovus Energy Inc. However, some of the big banks have pledged to maintain their payouts to shareholders.

A report from Richardson GMP said the number of firms cutting dividends is rising. So far, 17 TSX-listed companies have reduced their dividends and 12 have omitted them, it said, compared to 26 reductions and 33 omissions among firms listed on the S&P 500. GMP expects more to follow in the months ahead.

Capital Group noted that dividend cuts are far from universal. Nestlé, Zurich Insurance and German chemical company BASF are among those committed to preserving dividends, while U.S. consumer goods companies Procter & Gamble and Johnson & Johnson have hiked their disbursements.

Even firms such as Starbucks and ExxonMobil that have been hit by the shutdowns said they would maintain their dividends.

The divergence in dividend commitments requires more stock-specific research, the report said, and diversification beyond traditional dividend areas such as technology and healthcare.

Earnings analysis

With first quarter earnings wrapping up in the U.S. and the majority of Canadian companies already reporting (the banks, notably, are later this month), the GMP report took stock of the damage. It found that operating earnings for S&P 500 constituents fell 27% compared to Q1 2019, from $37.99 down to $27.89.

Since only a couple weeks of physical distancing policies fell within the first quarter, the impact in Q2 will be much more severe. Average estimates for S&P 500 aggregate Q2 earnings have dropped from $43 in mid-February to $24.30, the report said, and GMP expects consensus estimates to fall in the coming weeks.

“Social-distancing measures are likely going to fade slowly, and consumer demand probably won’t snap back,” the report said.

The authors also noted the concentration of gains among tech stocks. The latest acronym is FANGMAN, for Facebook, Alphabet, Netflix, Google, Microsoft, Apple and NVIDIA. Together they comprise almost one-quarter of the S&P 500 and are driving the gains, the report said, while more than half of index constituents are trading at least 20% below where they were on Feb. 19.

The question is whether the rest of the market will catch up to the tech leaders, or whether the FANGMAN stocks succumb to the coming recession. The report noted the stark contrast between the top performers and the thousands of small and medium-sized businesses that make up Main Street.

“If there was a private company index of barbershops, mom and pop restaurants and one-off gyms, it would be much more than 20% off the peak. The question is whether the overall market catches up to the tech leaders or catches down to the SMEs and economic data,” the report said.

“In our opinion, the latter is more likely and the reason we have been lowering equity exposure and beta.”