UK equity income funds are set to suffer a £28bn dividend short-fall this year as almost half of UK companies plan to scrap payouts to shareholders, according to new data.
Link Group’s UK Dividend Monitor, published today (April 9), showed UK companies have scrapped payouts to shareholders worth a hefty £28.2bn, representing more than a third (34.5 per cent) of the pot of dividend funds planned for this year.
As of yesterday, 45 per cent of Britain’s listed companies had axed their payouts or were certain to do so.
The first major blow for income came as the UK’s biggest banks scrapped their payments for the rest of the year following pressure from the Bank of England to maintain a cash buffer to help them through the coronavirus crisis.
According to Link, this accounted for £13.6bn of the dividends that have been culled.
Just yesterday further pressure from the central bank encouraged insurers, including Aviva, to suspend their payment until notice.
Banks and insurers cutting their payments will be particularly painful for UK equity income funds with a value tilt, which are typically more exposed to financials. For example, Schroder Income holds HSBC, Royal Bank of Scotland and Aviva in its top 10 holdings, accounting for 12 per cent of the fund.
Jason Hollands, managing director at Tilney, said the impact of such dividend cuts would be “very dramatic indeed” for UK equity income funds.
He added: “The FTSE 100 dividend futures are pointing towards a potential 60 per cent cut in dividend yields."
Mr Hollands noted that UK equity income investment trusts were at a technical advantage as they could top up dividends out of their reserves at the discretion of their boards.
For example, the board of the £1.4bn City of London investment trust has confirmed its intention to increase the dividend it pays to clients this year, despite the fund's holdings having been ravaged by the recent market chaos.
The majority of dividends in the UK are concentrated within a small number of firms.
The banks and oil companies between them account for around 37 per cent of the UK dividend pool, and the banks have already cancelled payments on mass. For now, the oil giants are still paying.
Mining companies are also big dividend payers. Glencore is among those in the mining sector to cut their dividend so far and according to Link, more mining dividends are at risk.
The safest dividend groups include defensive sectors such as food and drink, tobacco, utilities, food retailers, healthcare and basic consumer goods, Link stated.
Such sectors have already seen continued demand for their goods and services as the pandemic unfolded.
Kit Atkinson, head of capital markets for corporate markets EMEA at Link Group, said: “Even as we face the deepest recession since the second world war, investors can take comfort from the knowledge that tens of billions of pounds of dividends will still be paid this year.
“More importantly, they will bounce back next year, even under quite bearish scenarios.”
Mr Atkinson added that dividends “really mattered”, noting they provided income for pensioners and other types of investors and also underpinned share price valuations.
Mr Hollands agreed yields would normalise in 2021, but warned it was also possible some companies would take the opportunity to lower their dividend payments once they started paying dividends again.
He added: “For investors drawing an income off these funds to finance retirement, it is going to be a period of belt-tightening I’m afraid.
“These are times when it may make sense to tap into rainy day cash reserves to top up on missing income. That is a far better approach than cashing-in shares at distressed levels, which would only impair the recovery potential of portfolios.”
Paul Stocks, financial services director at Dobson and Hodge, agreed, saying some investors could instead revert to using capital as income for now.
However Mr Stocks added that, at least for some, the cut in income would be absorbed by lower spending throughout the pandemic and therefore, while concerning, it could be the case that the “income need is less” and so they “cancel each other out”.
imogen.tew@ft.com
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