Interactive Investor

There’s light at the end of the tunnel for income investors

27th April 2021 13:01

Tom Bailey from interactive investor

There are signs the Covid-19 dividend drought has come to an end, according to Link’s latest Dividend Monitor report.

UK dividends remain notably lower than they were a year ago, but the rate of the decline in payments is slowing, according to Link’s latest Dividend Monitor report.

In the first quarter of 2021, underlying UK dividends were 26.7% lower than in the first quarter of 2020. In total, £12.7 billion was paid out – a decline of £5.8 billion compared to the year before.

Since Covid-19 became a global pandemic in March 2020, scores of UK companies have cut dividends. According to Link, the second quarter of 2020 saw payments collapse by over 48% on a yearly basis. Dividends have continued to be lower in each quarter on a yearly basis, however, the rate of cuts has steadily slowed, with this quarter’s yearly decline the lowest yet.

Link also notes that half of UK companies either increased, re-started or held their dividends steady in the first quarter of this year, compared to just one-third in in the fourth quarter of 2020.

A big contributor to dividend payments came from housebuilder Persimmon (LSE: PSN), with a payment of £398 million.

Around half of cuts came from oil companies. Big cuts also came from: BT (LSE: BT.A)Compass (LSE: CPG)Associated British Foods (LSE: ABF) and easyJet (LSE:EZJ).

However, while underlying dividends were still down, headline dividend payments (which include special dividends) were up by 7.9%. Indeed, special dividend payments hit their second-highest total on record at £6.1 billion.

A big contributor was Tesco (LSE: TSCO) following the disposal of its Asian operations. The recent boom in commodity prices also saw large special dividends from miners such as BHP (LSE:BHP) and Ferrexpo (LSE: FXPO).

Looking at the full 12 months of the pandemic, measured from the second quarter of 2020 to the end of the first quarter of 2021, Link found that dividend payments dropped by a total of 41.6%, with two-thirds of companies reducing or cancelling payments. Therefore, Covid-19 lost investors a collective £44.8 billion in payments.

Banks, which were banned from paying dividends in the UK, made up 30% of the decline and oil companies another quarter. Miners, leisure and travel businesses, housebuilders and consumer goods firms also made a significant dent.

Link says that the outlook for dividends is now brightening and expects underlying dividends to rise 5.6% to £66.4 billion this year.

Ian Stokes, of Link Group, commented: “There are some big changes coming in the second quarter. During the pandemic, many companies that had been over-distributing permanently reset their dividends to more sustainable levels. Most of these now hope to grow their dividends from this lower base. For others, the effect of the cuts is more transitory so they will bounce back quickly.

“Most importantly, we will see the return of banking dividends although at relatively low levels. Investec (LSE:INVP) blazed the trail in Q1, but Q2 will see all the banks start paying again. The commodity boom is leading to a surge in mining dividends too, but we expect growth to get stronger and broader over the next six months.”

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