Companies that offer high but unsustainable dividends - which the team at Henderson International Income Trust (HINT) suspects account for 20% of all investable firms globally - are now twice as likely to slash their dividends as profits are expected to tumble by more than a fifth by the end of the year due to the coronavirus pandemic.
In HINT's Global Dividend Cover Report released last week, the team found that dividends jumped by 8.7% in 2019 to a record £1trn, outstripping global profit growth, which inched ahead by 1.1% to £2.2trn.
As such, the team warned that dividend cover has continued to fall - a trend that has been seen each year since the average dividend cover reached its post-Global Financial Crisis high of 2.9x in 2010 - and that this will only accelerate given the Covid-19 crisis.
Ben Lofthouse, manager of HINT, said that normally in a recession, companies would flex their dividend cover target and dividends would reduce much less than profits, but "so far, 2020 is proving to be different".
"In a normal year, we see 5%-10% of companies cutting dividends, but more than a fifth had already done so by May," he said. "Many companies taking one or another form of state support are unable - either by instruction or moral suasion - to pay dividends, while many more are simply cutting pay-outs to protect their balance sheets, either to increase cash reserves or to manage their debt levels."
According to Janus Henderson's recently-released Global Dividend Index report, dividends are set to fall by between 15% and 34% by the end of the year - more than they did during the Global Financial Crisis.
Lofthouse explained that, if dividends were to fall by only 15% this year, dividend cover globally would only decline from 2.1x in 2019 to 1.9x in 2020 - which compares "very favourably" to 1.4x in 2008.
If dividend payouts are reduced by 34%, he pointed out that dividend cover could rise to 2.5x - depending on what happens to companies' profits.
"This is extremely unusual, and it should give investors comfort that most big companies can weather the crisis," he said. "Naturally, nobody wants to see their dividends get cut, but if it is in the interests of protecting a company and ensuring it emerges from the crisis in good shape, then it is the right thing to do."
While 20% of companies have a dividend cover of less than 1.2x - making them what the team at HINT calls "dividend traps" - the fact the average dividend cover for 2019 stands at 2.1x is "encouraging", but emphasises the fact the average masks significant variation from country to country, according to Lofthouse.
The manager pointed out that Asia and Japan typically have a less entrenched dividend-paying culture, whereas the likes of the UK and Australia are often home to firms that pay unsustainably high yields during periods of slow growth for the company.
In 2019, all of the profits made by UK and Australian companies in Janus Henderson's Dividend Index were paid out in dividends; in addition to this being cultural, according to Lofthouse, UK dividend cover was squeezed by the plummeting oil price, while incumbent banks in Australia maintained high dividend pay-outs despite dwindling profit growth.
"In the US, dividend cover is much higher than its Anglo-Saxon peers, because US companies are more likely to use share buybacks as a way of returning capital to shareholders - share buybacks plus dividends, so-called total shareholder yield, is similar across all three countries," the manager explained.
"Meanwhile, in parts of the world newer to dividends, the culture of dividend-paying has caught on which means the dividend cover in these countries comes more into line with norms elsewhere.
"Over the past ten years, dividends have more than tripled in Asia, Japan and emerging markets, while profits have not quite doubled."
While HINT's report suggests global dividends may fall even further than profits this year, the team points out that cuts can be "the right thing to do" to ensure businesses emerge from the crisis in good shape.
"A temporary halt in dividends does not change the fundamental value of a company - that is driven more by the ability of the company to flourish and grow over the long term," Lofthouse said. "If retained or newly issued capital is no longer needed as the crisis passes, it will make its way back to shareholders.
"With interest rates set to be exceptionally low for the foreseeable future, shares will remain a vital source of income for shareholders."