Australian cases · Income
Yield Traps and the 2020 Bank Dividend Cuts
A falling price makes a yield look better right up until the dividend is cut. In 2020 the major banks did not all do the same thing, and the differences matter more than the headline.
The most dangerous number on an income investor's screen is a trailing yield on a share that has just fallen hard. It looks like opportunity. Sometimes it is. Often it's a dividend that hasn't been cut yet.
How the trap works
Trailing yield is the last twelve months of dividends divided by today's price. The dividend in that calculation is history. The price is now.
A hypothetical. You buy a share at $30 that paid $1.80 last year, fully franked. That's a 6 per cent cash yield. The price falls to $20. On the old dividend, the yield now reads 9 per cent, and somebody on a forum is calling it the buy of the decade. Then the board halves the dividend to $0.90.
That's the three-way hit:
- the capital is down a third;
- the cash income is down half;
- the franking credit is down half too, because it is attached to the franked dividend.
For a retiree in pension-phase super who was counting on that refund, the third one stings more than people expect.
2020: what the banks actually did
You will still hear that "the banks all cut their dividends in COVID" or, from the other side, that "the banks kept paying". Neither is accurate. Here is what the company records show.
- CBA paid a $2.00 interim in March 2020, declared before the pandemic guidance landed. Its final was 98 cents, for a 2020 total of $2.98, fully franked. The final was about half of second-half earnings, in line with APRA's request that banks retain at least half of their earnings.
- Westpac paid 94 and 80 cents in 2019. It paid no first-half dividend in 2020, then 31 cents in December.
- ANZ paid 80 cents twice in 2019. In 2020 it deferred its interim decision, then paid 25 cents in September and 35 cents in December.
- NAB paid but cut its interim dividend heavily.
Four banks, four different paths. Someone holding CBA had a very different 2020 income year from someone holding Westpac, and someone holding all four plus Telstra had an income year shaped by all of it at once.
What was knowable at the time
By early April 2020, APRA had publicly asked banks to consider deferring dividend decisions and to use capital to keep lending. Share prices had already fallen hard. What nobody knew was how deep the loan losses would go or how long the guidance would last; APRA eased it in December 2020. An investor could see that bank dividends were under official pressure. They could not see the size of each cut in advance.
Why the "safe" income portfolio got hurt
The trouble in 2020 wasn't that a bank cut its dividend. Banks are businesses; dividends get cut. The trouble was concentration. A self-managed portfolio built around the major banks had one regulator, one economy, one sector and one sort of borrower behind all of its income. When the shock came, the diversification turned out to be four tickers of the same thing.
How to spot the trap earlier
- Compare the dividend with earnings and free cash flow, not with the price.
- Ask why the price fell. Temporary fear and permanent damage produce the same yield number.
- Check whether a regulator, lender or board has a reason to restrict payouts.
- Look at the total return, not just the income line.
What to do with this
List your income holdings and the share of total income each one provides. If one sector supplies more than half, write down what your income would have been in 2020 using the actual cuts above. That number is a better guide to your risk than any yield screen.