2020 was a mixed year for income investors.
Some businesses paid out more dividends even as the pandemic wreaked havoc on Singapore’s economy.
Other companies made preemptive decisions to limit payouts to preserve their balance sheet strength..
Fortunately, Singapore has probably seen the worst of the pandemic, even as the country transitioned to Phase III of its reopening on 28 December.
But the challenges are not over yet.
Countries around the world are still grappling with mounting death rates as a new strain of COVID-19 threatens a new wave of infections.
Amid significant uncertainty, could income-driven investors see a respite this year?
Will dividends be able to recover to their former glory?
Disbursing retention sums
First off, we take a look at the REITs sector.
Many REITs in the retail, hospitality and commercial sectors had retained cash to disburse to needy tenants as part of their tenant relief measures.
As a result, distribution per unit (DPU) also fell sharply in line with lower distributable income.
For instance, Frasers Centrepoint Trust (SGX: J69U) extended S$27.4 million in rental rebates in the second half of its 2020 fiscal year ended 30 September 2020.
Because of this move, DPU fell by 26% year on year to S$0.04372.
However, unitholders should note that these sums ultimately have to be paid out as a REIT has to distribute at least 90% of its taxable income to qualify for tax exemption.
In short, these retention monies are merely deferred and will be paid out at a later date as the Monetary Authority of Singapore has allowed REITs to waive the 90% rule until the end of 2021.
Mapletree Commercial Trust (SGX: N2IU) has already released part of its previous retention sum.
For its fiscal 2021 first-half results, the distributable income of S$138.4 million includes S$15 million that was released from the original S$43.7 million retained in the fourth quarter of the fiscal year 2020.
Improved business conditions
Some businesses that were hit badly by the pandemic had eliminated dividends.
One of these is VICOM Limited (SGX: WJP).
For its fiscal 2020 first-half results, the vehicle inspection and testing company announced that it will not declare an interim dividend to conserve cash in light of the pandemic.
At the end of the fiscal year, management will review the final dividend in light of changing conditions.
As business conditions have improved significantly since the circuit breaker period from April to May, there’s a possibility that dividends could be restored, albeit at lower levels than last year.
Certain sectors remain under stress
Despite the successful control of the spread of community cases in Singapore, certain sectors such as aviation and tourism remain under pressure as the coronavirus continues to run rampant in other countries.
Although several vaccines are being distributed around the world and administered to frontline healthcare staff and vulnerable people, it will still take a considerable time for the pandemic to be brought under control.
For companies within these sectors, it may take several years before they see a sustained business recovery and can start paying dividends again.
Businesses such as SATS Ltd (SGX: S58) and Singapore Airlines Limited (SGX: C6L) continue to grapple with challenging conditions as there is no visibility on when lockdowns and border closures will be lifted.
Get Smart: Dividends to stage a tentative recovery
All in, we should see dividends staging an uneven recovery.
As business conditions slowly improve, several companies may declare higher dividends than they did in 2020.
However, investors should be mindful that dividend levels may not head back to 2019 levels anytime soon as uncertainty over the pandemics persists.
Still, it will be a welcome respite for many dividend investors after the unprecedented events that occurred last year.
And if you had invested in strong businesses with a sturdy competitive moat and balance sheet, you would still be able to sleep well at night.
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Disclaimer: Royston Yang owns shares in VICOM Limited and SATS Ltd.
