Nine in 10 UK shares have cancelled or suspended dividend payments

A year, or perhaps longer, of cancelled or suspended dividends has the potential to result in significantly lower future returns for UK investors.

UK income investors are going through somewhat of a drought in dividends at the moment, with nine out of 10 UK listed companies having cancelled or suspended dividend payments in recent weeks.

According to research from ETF provider GraniteShares, a total of 162 UK-listed companies have cancelled or suspended payments between 19 March and 20 April. With a total of 176 companies providing dividend updates over this period, 92% announced suspensions or cancellations.

The 14 companies that made dividend payments were Chesnara, 888, Winkworth PLC, S&U, Tesco, Tritax Big Box, Greencoat UK Wind, Anglo Pacific, Hilton Foods, Sabre Insurance, Hunting, Ocean Wilson Holdings, Mortgage Advice Bureau and SCS.

Such a widespread suspension in dividend payments will be troubling for those invested in the UK market. For several historical reasons, the UK has always been a relatively generous dividend payer. This has largely made up for the price growth, or capital gains, of the UK’s main index, the FTSE 100, being much more muted compared to other markets around the world.

For example, as GraniteShares points out, £1,000 invested the FTSE 100 on 31 December 1999 would have given investors a capital return of just £204 by November 2017. That represents an annual growth rate of 1.1% and a return of 20.4% over the period.

However, once dividends are taken into account, returns look much less depressing. For example, had the investor re-invested all their dividends over that period, with the benefits of compounding, their £1,000 would have provided a return of £1,193, representing an annualised growth of 4.6%. The investor’s return over the period would have been 119.3%. A year, or perhaps longer, of cancelled or suspended dividends has the potential to result in significantly lower future returns for UK investors.

Unfortunately, says Will Rhind, chief executive of GraniteShares, investors may face further dividend cuts. He notes: “Given the economic crisis that has resulted from coronavirus, it is likely to be some time before most companies’ earnings return to pre-pandemic levels. It is only then that we could hope to see dividends returning to their 2019 levels.

“The reality is that we will probably see more cancellation or reduction of dividends as businesses struggle to preserve cash.”