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Home Kuo’s Smart Take Smart Thought Of The Week: Dividends

Smart Thought Of The Week: Dividends

I wonder how many of us dumped our bank shares earlier this year at the first sign that COVID-19 was going to be a huge problem for the world? Quite a few by the look of things. Singapore’s three biggest lender fell around 30% in the first three months of 2020 on the worrying news.

The sentiment against bank shares was further exacerbated when many regulators told banks to retain more capital by discouraging – if not banning – them from paying dividends and from buying back their own shares.

In hindsight, we can see that banks were much better prepared for the fallout from the pandemic than during the financial crisis of 2008. The stringent stress test designed by regulators to determine if banks were strong enough to withstand economic downturns had worked.

Consequently, it is reassuring to see that the European Central Bank, the Bank of England, the Australian Prudential Regulation Authority, and the US Fed have allowed banks to distribute cash to shareholders again, albeit at a reduced level.

It is a sign that the global economy is gradually returning to normalcy, even though things are far from normal. That said, it is important that bank dividends have been allowed to resume.

A prolonged period of dividend drought could have raised embarrassing questions about whether the stress tests were just a waste of everyone’s time. Why put banks through the wringer if, at the first sign of trouble, they should buckle at the knees?

It is also important for banks to know that they can always rely on shareholder support. A protracted period of dividend deferrals could have sapped the enthusiasm of the market for bank shares when they might need them most.

For bank investors, it is important to remember that the resumption of dividends will be both gradual and measured. Lenders are unlikely to go crazy and pay out their planned distributions for 2020 in full next year.

Instead, the payouts will be adjusted according to the ongoing uncertainties. So, investors need to be patient, which, by the way, is the secret of successful investing.

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Disclosure: David Kuo does not own shares in any of the companies mentioned.