UK dividends are unlikely to recover to pre-pandemic levels until 2025 at the very earliest after the coronavirus crisis wiped away eight years of shareholder payout growth.
Link Group’s latest dividend monitor, published today (January 20), shows dividends stood at £61.9bn in 2020 — 44 per cent less than 2019 and the lowest annual total since 2011.
Susan Ring, chief executive of corporate markets at Link, said the social and economic scars of Covid-19 would be “deep” and it was therefore highly unlikely dividends would regain their previous highs until 2025 “at the earliest”.
She added: “There are reasons for optimism, but the resurgent pandemic has pushed back the reopening of the economy even further, especially in the UK.
“We still believe the worst is past, but a new lockdown means our expectations for 2021 are significantly more subdued.”
David Smith, portfolio manager of Henderson High Income Trust, agreed, predicting it would be at least 2022 before the UK saw any significant dividend growth.
But he added: “There will be pockets of strong dividend growth within the market this year for the selective investor.
“Despite the terrible year for income in 2020, a dividend yield of 3.1 per cent for the UK market is still attractive and this level is likely to be more sustainable going forward with the opportunity to grow from its lowered base.”
Link predicts that a best-case scenario for the UK would see dividends increase by about 10 per cent in 2021, while a worst-case option suggests payouts could fall again, dropping around 0.6 per cent to £61.5bn.
Income investors have been hampered throughout the coronavirus crisis as some firms voluntarily reduced their dividends in an attempt to form a cash buffer against the economic impact of the pandemic.
Others were forced to hold back on payouts to shareholders. The Bank of England strongly suggested banks and insurers suspend their dividends while the government mandated any firm using a support scheme should not be paying out funds to shareholders.
Some two thirds of companies cut or cancelled their payments in 2020, totalling £39.5bn of lost dividends.
By far the biggest impact came from the financial sector, accounting for two fifths, or £16.6bn, of the Covid-19 cuts between April and December.
Oil stocks were the next biggest loss, costing shareholders £8bn in lost income after struggling to sustain their large payouts in recent years as the oil price plunged due to a lack of demand.
In general, FTSE 100 payouts fell less than mid and small-caps, down just 35 per cent for the whole year, while smaller firms cut payouts by 56 per cent.
The classically defensive sectors of healthcare, basic consumer goods, food producers and food retail were true to type in 2020, and their dividends were flat or only slightly down between Q2 and Q4.
Ms Ring said that while a slightly better end to 2020 was a cause for relief, it was not time for a “celebration”.
She added: “This was a dreadful result for UK investors, especially those for whom dividends are a major source of income.