Another unfortunate consequence of this coronavirus-induced stock market crash we’re living through in 2020 is the death of the so-called ‘safe dividend share’.
Cast your mind back to January (although it already feels like a lifetime ago).
Interest rates were at a (then) record low of 0.75%. Yield was a premium on the stock market. Most ASX dividend shares had been bid to the heavens, but there were some that commanded an especially high premium.
These ASX dividend shares were so safe that investors were starting to describe them as ‘bond proxies’ – carrying an equivalent level of income security to government bonds.
These shares were incontrovertibly expensive by any metric – but investors didn’t care. They were getting an ultra-safe yield of between 3-5%. Term deposits were offering 1.8% at a maximum, so it was a ‘no-brainer’.
Transurban held a virtual monopoly on major arterial roads across Sydney, Melbourne and Brisbane. Sydney Airport commanded a similarly powerful monopoly on NSW’s major international gateway and the only major airport servicing Australia’s largest city.
What could go wrong?
Well, the coronavirus, that’s what.
Despite all of these highly defensive characteristics, Transurban and Sydney Airport have not proven immune to the economic carnage that the coronavirus has caused.
Restrictions on working and moving outside of home have reduced Sydney’s traffic volumes to levels not seen in decades. Transurban saw a fall of more than 30% in vehicle volumes for the two final weeks of March.
And Sydney Airport is a veritable ghost town, with recreational international travel for most Australians banned indefinitely. The borders are virtually closed to international travellers.
We already know Transurban’s dividend payments in 2020 are going to be materially reduced.
We haven’t yet heard from Sydney Airport on its plans for dividend payments, but frankly, I think investors will be lucky to be getting much at all this year.
All of these ructions goes to show that nothing is certain in the share market. Safety can be an illusion – and income is never, ever guaranteed. You still have to buy government bonds for that privilege.
I’m not saying that Transurban or Sydney Airport isn’t a good investment. But I am saying that their status as a ‘bond proxy’ was misguided in hindsight. As is this idea for any ASX share.
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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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