Self-funded retirees have seen their nest-egg investment assets plunge due to COVID-19 and pressure from APRA on companies to cut dividends has made matters worse, according to Midsec Financial Advice.
Midsec director Phillip Middleton said APRA's pressure on the banks to cut or at least reduce their dividends to protect capital ratios was a poorly considered approach because it impacts shareholders who rely on dividend payments for day to day living.
"Slashing dividend payments might be the easy option for banks, but it shows lack of respect for investors," Middleton said.
"Banks can achieve the same capital ratio position and still pay dividends by having a pro-rata capital raising for an equivalent amount, which would throw many investors a lifeline when they need it the most."
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Middleton said self-funded retirees have been "set adrift" during the pandemic because they have not received any cash handouts and seen asset values drop around 20% to 30%.
"Adding to their pain, interest rates on term deposits have dropped, investment dividends have been reduced by companies struggling to stay sustainable, and now the salt in the wound is having APRA pressure banks to reduce their dividends too," he said.
Middleton said the reality is that some investors, including plenty of self-funded retirees, may never get back to where they once were.
"While the bank's capital position is unaltered by having a rights issue to effectively fund the dividend, the shareholders are better off because they get some cash now, plus a franking credit refund later in the year," Middleton said.
"Additionally, bank share prices tend to recover quite quickly after going ex-dividend, so the shares don't suffer the full cost of the dividend payment."
Middleton said this compares pretty poorly with the alternative of selling shares in a depressed market to get enough cash for living expenses.
"Rights issues do reduce share price growth in the future because there are more shares on issue. However, if you ask a retiree if they prefer income now or growth in the future you will get very few who go for the growth," he said.
"As it stands right now, APRA's poorly considered approach brings together two interesting bed fellows who ultimately benefit - the government because it doesn't have to refund franking credits and management teams of banks, whose bonuses are based on rises in the share price."
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