Good news: UK dividends are returning

Jeff Prestridge

Jeff Prestridge

Although juicy company dividends are not loved by everyone, they are one of the defining characteristics of the UK stock market.

For those who advise clients on wealth creation and wealth decumulation in retirement, they are an essential piece of the investment jigsaw puzzle. An income tool. A reinvestment option. 

Many investors, a large slice of them elderly, depend upon dividends to help keep their retirement income in good order. Others automatically reinvest them in order to help build a bigger investment pot that they can then access in the future. Oh, the delights of compounding.

Long before lockdown, my local newsagent close to where I work in London’s Kensington never used to let me buy a paper without first boasting about his marvellous collection of dividend-producing stocks. He then suddenly announced one frosty morning he was retiring to live off the dividends from his investments. 

Given the 43 per cent drop in UK dividends last year, I do often wonder whether he’s financially all right and is managing to do all the things he planned to do to make up for the regular five o’clock starts in the morning, sometimes standing in the freezing cold in his little kiosk on Kensington High Street with ruddy cheeks, but always wearing a welcoming smile.

Thankfully, as far as my former newsagent and millions of other equity income investors are concerned, UK dividends are bouncing back strongly.

The latest forecast from Link Group, authors of the authoritative UK Dividend Monitor report, suggests that total dividends this year, including one-off special payments, could surpass £93bn – a near 45 per cent increase on the previous year. 

Although Link is concerned that lower commodity prices will inhibit the ability of the big mining companies to sustain their healthy dividend payments, it still believes that 2022 will be one of overall UK dividend growth, albeit it with challenging headwinds. UK plc, it predicts, will offer investors an income of some 3.5 per cent over the next 12 months. Quite attractive given the paltry interest rates available from saving accounts.

The UK stock market’s propensity to generate dividends has been acknowledged out west by the mighty investment bank JPMorgan. It is one of the reasons why the bank is keener on UK shares than it has been for a very long time. The London Stock Exchange, it says, offers a winning combination of undervalued shares that also have the ability to pay a half decent income in the near term. 

While many advisers will try to capture this income potential for clients through UK equity income funds, I think they should broaden their horizons and consider UK equity income investment trusts, whose shares are listed on the London Stock Exchange. 

A brilliant report hit my desk a few days ago from analysts at Investec. It looked at the resilience of many – not all – of these trusts to keep paying a growing income to shareholders throughout the 2020 UK dividend crisis. In most cases, they did this by drawing on income reserves built up in the past to top-up the income generated from their portfolio. Of course, their reserves have taken a hit as a result, but some trusts still have enough income left in their tanks to ensure shareholders continue to enjoy income growth in the near future.