For income-hungry investors, the menu of low-risk options already looked fairly sparse at the start of 2020.
Fast forward six months and the challenge is even greater. Rate cuts and asset purchases from the central banks have performed the essential role of keeping government borrowing costs low, but for those seeking income, the negative side effect is that low-risk options are increasingly scarce.
Investors have been turning to higher risk asset classes including equities for income over recent years, yet dividend cuts have become a hot topic as companies look to shore up balance sheets against the shock from Covid-19.
While we acknowledge that dividends in some regions will face pressure over the coming months, it is essential not to mistake what for many firms will be a cyclical issue as a structural one.
Corporate earnings are set to contract sharply in 2020, with economic growth downgrades implying a hit to earnings in the ballpark of 20%-30% across most developed markets.
The relationship between dividends and earnings has historically been quite strong. Intuitively this makes sense: the more money a company makes, the more it has available to return to shareholders.
The energy and financial sectors warrant particular attention as two of the largest contributors to dividends prior to the coronavirus outbreak.
Payouts from both sectors are coming under pressure. Banks in the UK and continental Europe have been told by regulators to hold off from paying dividends to ensure that capital is available for lending.
Energy company earnings have been hit by weaker oil prices, and dividend cuts by some of the UK market's most revered dividend payers in this sector have attracted attention.
Other sectors will also see dividend pressure in the near term, particularly while companies receive substantial government support.
Consider the wage subsidy schemes that have been a key part of the coronavirus policy response.
The goal of preventing lasting scars to the jobs market is absolutely appropriate, but it will be tough politically for companies that are receiving wage subsidies to simultaneously pay out money to shareholders.
Given the size of this shock, dividend cuts in many regions will likely exceed the hit to earnings in 2020. The relatively higher weights to financials and energy in UK and continental European indices does not help the near-term dividend outlook for these markets.
On a more positive note, high dividend yielders have already materially underperformed broad European benchmarks year-to-date.
For companies with robust financials that will survive this hit to activity, market pricing suggests that in some cases investors may be confusing temporary headwinds to dividends for something more permanent.