UK dividends tipped to post first decline in five years

We explain the two main reasons why income investors might expect less luck in 2020.

For the third year running, UK dividend payments have hit new record heights in 2019, posting a year-on-year rise of 19.7% in headline terms, to £110.5 billion.

To put these figures into context, this is more than double the total value of dividends that were paid a decade ago (£54.6 billion) following the global financial crisis.

But a more muted picture is predicted for 2020, according to Link Group’s dividend monitor report, owing to various headwinds. Link Group forecasts a 7.1% decline in dividend payments, to £102.7 billion. If this is achieved, 2020 will go down in the record books as the second best year for the value of dividend payments paid to shareholders.

However, more gloomily, it would be the first year-on-year decline since 2015. Moreover, in every quarter of 2020 dividend growth is predicted to be negative.

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The two main drivers declining the decline have been the main reasons behind UK dividend payments’ record levels in 2017, 2018 and 2019.

The first is special dividends, which in 2019 tripled to £12 billion and therefore accounted for more than 10% of total dividends paid. By their nature special dividends are unpredictable and should be viewed as a bonus, rather than being relied upon. In 2019 various dividend-friendly sectors of the market paid special dividends, including mining firms, banks, IT businesses, housebuilders industries and hotel and leisure companies.

But looking ahead, Link does not expect such large special payouts to continue and predicts that such payments will revert to more normal levels. This is mainly due to the anticipated decline of dividends from mining businesses. Link says the sector has “provided the main engine of UK dividend growth in the last four years, increasing their payouts sixfold since the commodity slump of 2015-2016.”

The report adds: “In 2019, all of the growth in mining dividends came via special dividends from Rio Tinto (LSE:RIO) and BHP Group (LSE:BHP), along with some smaller operators. We do not expect these to be repeated in 2020, and this will act as a major drag on UK dividends overall.

The second big helping hand that has benefited income investors over the past couple of years has been the weak pound. Indeed, as Link notes, two-fifths of UK dividends are declared in US dollars, so the changing exchange rate makes a significant impact on the sterling value paid. This is because a weak pound inflates the value of dividends when translated back into pounds, and vice versa, In 2019, for example, if exchange-rate effects were excluded, dividend growth would have stood at just 0.8%.

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Link thinks this tailwind will turn into a headwind in 2020, with the pound strengthening and in turn depressing dividend growth. This chimes with most commentators, who expect the pound to appreciate against both the US dollar and the euro following the general election result in December, which has removed short-term uncertainty over the form Brexit will take.

Michael Kempe, chief operating officer of Link Market Services, says: “The spice of huge special dividends and the zest of big exchange-rate gains enlivened what was in truth a rather bland year for UK dividends. 2020 is not set for the same superficial excitement.

“Oil prices have jumped recently on rising tensions in the Middle East, but this is unlikely to lead to increases in dividends from the sector. With payouts from the UK’s other biggest payers also unlikely to move very much and the big mining groups no longer providing the engine of dividend growth that drove UK dividends over the last three years, we do not expect significant increases from the top 100 either.

“More importantly, UK dividends face the significant headwinds of a stronger pound, and the likely decline of special payouts to more normal levels.”

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