Challenging times for income investors in this falling market and what to do

It has become a very tough market for all investors. Shares with high valuations have certainly been hit very hard, JD Sports is a prime example of this. But even defensive shares have fallen. Over the last month, 99 out of 100 shares on the FTSE 100 have seen share prices go down. The exception is Ocado.

It’s a tough time for income investors as well because the near-unprecedented scale of the economic impact COVID-19 is having, has seen swathes of companies suspend or cut their dividends. That’s on top of many profit warnings.

Examples of recent suspensions of dividends since I last reported are Dunelm, Redrow, Greggs (god not Greggs as well!), G4S, Card Factory, Kingfisher, N Brown, IWG, Aggreko, Stagecoach and Go-Ahead. As I’ve said before, this isn’t confined to any one particular industry, although it’s clear from these highlighted dividend suspensions that transport, and retail, continue to be amongst the hardest hit sectors.

There’s the added complication that arises from companies now starting to delay releasing their results, which will leave investors with less information to work with when trying to work out in which companies to invest, Overall, it’s a pretty tricky to time to invest, especially, if you want or need income from your investments.

As I recently laid out in my blog about investing in my first bear market, I intend to keep on slowly and surely investing and take advantage of averaging down the price of my investments.

1) Not sell ANYTHING
Why? The market has fallen so far that unless you’ve been invested for a long time you’re almost certainly just crystallising losses. Even if you have been invested for a long time, most good companies will in all likelihood see out this period of falling demand and uncertainty, especially with the government saying it’s on a war footing and willing to do whatever it takes to support the economy.

2) Assume that this could last 18 months +, so don’t rush to buy
Patience is key. Prices could still go lower. So, as well as not selling anything from this point onwards I also wouldn’t rush to buy more shares. Also, I have no idea how long this bear market will last but Russ Mould from AJ Bell says it has taken an average of 648 days for the past 10 bear markets to recover to their previous highs. Therefore, there’s no rush to buy shares all in one go now.

3) Drip feed investments, to better spread the cost I pay
While not in a rush to buy, I’ll add some more shares in companies I already own and most likely add new positions into companies on my watchlist, which are now much cheaper than they were. By drip-feeding my investments this way I will pay a range of costs for shares I really want to hold and benefit from averaging down if the markets do worsen while having cash ready to invest when markets improve.

4) Add as much cash as I can – luckily I work
I’ll keep plenty of cash in my ISA, LISA and SIPP so that I can drip-feed my investments and take advantage of opportunities as and when they arise. At a time like this cash really is king. I’ll likely keep any dividends I receive as cash and add as much additional cash to my ISA as I can, especially as a new tax year approaches.

It’s worth remembering all bull runs come to an end at some point. This is how the markets work, so what is happening now was inevitable at some point. The recovery stage is also an inevitability and this is why I suggest hanging in there if you can.

One other thing which I hope it’s not too flippant to say is there is more to life than investing. Yes, the markets falling sharply is unnerving, especially when a fall like this is a new experience, but at the end of the day, the markets will pick up at some point.

The suspension of dividends is particularly worrisome for income investors which is why concentrating on higher-yielding defensive companies with good dividend cover would be a good strategy at this time. For example, AstraZeneca, National Grid, Unilever and WM Morrison Supermarkets would be examples of these kinds of shares. They may well continue to fall in this market as well. But they should be able to maintain payouts and fall less because they are defensive.

Please note I own shares in AstraZeneca and National Grid.

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