How to seize the income opportunity

This article is part of
Guide to UK equities after the pandemic

Simon Moon, who runs the Unicorn UK Income fund, says: “The UK dividend market was turned on its head in 2020 as the pandemic forced companies to rebase their dividend policies to sustainable levels. Companies and sectors that had been the core of many income strategies slashed dividend payments. The banking sector, the third largest paying sector, was forced to cancel dividends entirely.

"The two largest paying sectors in 2019 – oil, gas and energy, and mining — almost halved their payments. Despite this extreme disruption, high-quality income payers can still be found.

"When looking for a pattern in those companies which had hitherto been dividend stalwarts but which subsequently became unstuck, certain similarities can be seen. Many of those companies were highly indebted. Many had been paying ‘progressive’ dividends (increasing year on year) to a point where they had become unsustainable from a dividend cover perspective.

"Many had little or no pricing power due to exposure to commodities. As such, the short but severe disruption caused by the pandemic led to the inevitable conclusion of these companies rebasing their dividends to a realistic level."

Tom Moore, UK equity income fund manager at Aberdeen Standard Investors, quantifies the dividend gap in the UK by noting that UK-listed companies paid out £112bn of dividends in 2019. This fell to £64bn in 2020, and he says he expects it will not have recovered to previous levels in 2021, noting that Link dividend monitor puts the best case for dividends at £75bn.

Moore says he views this figure for 2021 as “pessimistic”, as while he says some companies will be cautious about how much they pay out, others, particularly those in the mining sector, will be able to significantly increase their payouts, as commodity prices have rebounded strongly. 

He is also keen on some consumer-facing businesses as he says the exceptionally high level of savings built up during the pandemic means there is a “wall of money” coming to the economy. 

Philip Matthews, multi-asset investor at Wise Funds, says some niche property investment trusts, such as Ediston, have fallen sharply in price on the basis they are exposed to an uncertain future as consumer and work habits change, but he says some of the niche trusts may be on the right side of these changes, despite the share prices falling. 

Brendan Gulston, co-manager of the Gresham House Multi-Cap Income Fund, says the story of 2021 has been the continued concentration of dividend payments with a small number of very large companies.

He says: “The concentration of dividends within FTSE 100 companies increased with the top five dividend payers in Q1 2021 representing 56 per cent of all UK dividends.