UK dividends halve in third quarter, but green shoots emerge

It was another bleak three months for income seekers, but there could be some light at the end of the tunnel.

UK dividends halved in the third quarter of the year as two-thirds of companies cut or cancelled their payouts to shareholders in “unprecedented disruption” to the dividend landscape.

The latest UK Dividend Monitor report from Link Group reveals that dividends dropped 49.1% to £18 billion, the lowest third quarter total since 2010. However, although steep, this decline was less severe than that seen in the second quarter, when three-quarters of companies cut or cancelled their payouts.

In total, investors lost out on £14.5 billion worth of dividends in the third quarter as retailers, travel companies, banks, oil companies and miners cut payouts. Elsewhere, media, house-builders and discretionary consumer goods and services providers also took the axe to their dividends amid the challenges of doing business during a pandemic.

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Dividends restart

However, the report notes that positive signs are emerging, with some companies now restarting dividend payments. Companies including BAE (LSE:BA.) began to catch up on missed payments, while others such as Direct Line (LSE:DLG) restarted their dividends and others signalled that they would do so in the fourth quarter. “There are some signs of light appearing, although we caution that it will be a long haul back to strength for UK dividends,” the report says.

The largest companies were better able to protect their dividends than small and mid-cap companies. The 100 biggest firms that pay dividends cut by 42.9%, compared to 60.4% from medium-sized businesses and 69.5% from small caps.

Best-case scenario

For the year as a whole, Link expects UK dividends to fall to around £60 billion, which would be a decline of around 39%, while next year it forecasts an increase of 6% to 15%. In a best-case scenario, UK plc will yield 3.6% over the next 12 months, Link predicts. 

It says “the worst is over” and, following the first quarter of 2021, the UK will have passed the Covid-19 “trough” for dividends.

“UK plc is not out of the woods, but the trees are perhaps thinning a bit,” says Susan Ring, chief executive officer of corporate markets at Link Group.

“Our worst-case scenario has steadily improved all year and, though UK investors face a historic decline in their income this year, the worst is now behind us. As companies become better able to assess the impact of the pandemic and the associated restrictions on their operations, some are restarting dividends and a handful are even making up some of the lost ground.”

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Long road ahead

Ring notes that looking ahead, there is still huge uncertainty. She points out that oil dividends are unlikely to increase much from here, while no one knows if the Bank of England will allow the banks to begin distributing again.

She adds: “There’s no doubt we have a long road ahead before dividends return to pre-pandemic levels, but there is now at least a signpost to the route that will take us there.”