Equity Income  

Dividends take ‘biggest hit in generations’ after 57% plunge

Dividends take ‘biggest hit in generations’ after 57% plunge

The amount of cash paid out in UK dividends dropped by a record £22bn in the second quarter of 2020 as the Covid-19 pandemic sent the world into lockdown.

Link Group’s dividend monitor, published this week (July 20), showed dividends fell by 57.2 per cent year-on-year in the second quarter of 2020 as 176 companies cancelled payouts and a further 30 cut them.

Those culling or slashing their payouts represented three quarters of dividend payers in Q2 and prompted the biggest quarterly fall on record.

Link said 2020 would, without doubt, see the “biggest hit to dividends in generations”.

Some firms have voluntarily reduced their dividends in an attempt to form a cash buffer against the economic impact of the pandemic, while others were forced to hold back on payouts to shareholders. 

The Bank of England strongly suggested banks and insurers suspended their dividends while the government mandated any firm using a support scheme should not be paying out funds to shareholders.

Link predicts the total dividends paid out from UK companies in 2020 to be a mere £56bn in a worst-case scenario, and little better at £61bn in a best-case future. By comparison, the UK paid £111bn in dividends in 2019.

Just over half (51.5 per cent) of all the cuts in Q2 2020 came from banks and financials, many of which were forced to stop payments by the Bank of England.

Income investors lost out on £7.5bn worth of dividend payouts in Q2 compared with last year while general and life insurance companies’ payments dropped by around half, from £3.5bn to £1.8bn.

The financial sector was by far the worst hit in the three months to June, with oil, gas and energy being the next hardest hit group and accounting for 13.7 per cent of the cuts.

Mining companies distributed £6.5bn in dividends in Q2 2019, but only paid £3.1bn in Q2 this year.

Link predicts that in the best case, the average yield of the UK stock market for dividends will be 3.6 per cent in the next 12 months and 3.3 per cent in a worst case scenario.

This has prompted a number of fund managers to seek yield elsewhere. Quilter's Helen Bradshaw has allocated clients' funds to the US, Asia, infrastructure portfolios and alternative mandates as the UK’s dividend total dried up.

Meanwhile star fund manager Nick Train has argued the crisis will transform the playing field for UK companies, saying firms can now put less emphasis on dividend payments in order to target growth.

In the second quarter of 2020, FTSE 100 dividends dropped by less than those typically paid out by the mid-caps in the FTSE 250. 

Payouts from the UK’s blue chip index fell by 45 per cent in Q2 compared to 76 per cent for the FTSE 250, as mid-caps are typically more domestically focused and operate in sectors more sensitive to the economic cycle.

This meant firms in the FTSE 100 accounted for 92.1 per cent of the UK’s dividend payouts in Q2 of this year, with the FTSE 250 paying 6.3 per cent of payments.