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Bank dividends no ‘silver bullet’ for income

Bank dividends no ‘silver bullet’ for income

The reinstatement of bank dividends is a move in the right direction but no “silver bullet” for investors hungry for income, according to experts.

Last week the Bank of England gave banks the green light to resume dividends after asking them to suspend payouts to shareholders in March in a bid to ensure the banking sector had buffered balance sheets to deal with the covid crisis.

They were among hundreds of firms, including insurers, to cull dividends amid the crisis. This, alongside historically low bond yields, left income investors billions of pounds short throughout the year.

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But although the move has been branded a positive step for investors, experts are sceptical it marks the end of investors’ troubles, though they said it was likely the “worst was over”.

Ben Yearsley, investment consultant at Fairview Investing, said: “I’m not sure it's a silver bullet, as each company and sector has had its own issues to deal with.

“However, banks were the only sector forced into not paying dividends, clearly having a massive effect on share prices.”

Mr Yearsley said it was “good news” that dividends could be resumed, noting that 2021 was “clearly better” for income seekers, as many companies who did not pay this year had indicated a willingness to return to paying shareholders from next year.

Darius McDermott, managing director at Fund Calibre, agreed, adding that the quest for income was “still ongoing”, particularly as investors were having to move up the risk scale to gain interest or dividends with cash interest levels at such low rates.

He added that it was a welcome sign that the Bank of England believed banks were strong enough to pay dividends again.

Jason Hollands, managing director at Tilney, was optimistic but warned there would be some dividend cuts that were permanent. 

He said: “I do think the worst is over for dividend seekers after a year of widespread cuts and suspensions. 

“As the economy recovers from the worst contraction in 300-years, pay-outs should resume but not to the pre-crisis levels which were historically high.”

Mr Hollands added that even as profits picked up again, many businesses were likely to take the opportunity to rebase pay-out rates to levels from which they could progressively grow.

A recent dividend monitor showed Janus Henderson predicted global dividends would fall 17.5 per cent in 2020, to £900bn, while a worst case would see a 20 per cent dip to £870bn.

The UK was the worst performing region. Having typically been seen as a ‘dividend haven’, the pandemic has prompted some allocators to shift money towards other markets while others have predicted a ‘reset’ which will see UK equity income yields drop long-term.

imogen.tew@ft.com

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