Q1 dividends and upcoming payouts: will income return to pre-Covid levels?

interactive investor experts discuss the direction of travel from here.

The latest UK Dividend Monitor by Link Group signals light at the end of the coronavirus tunnel when it comes to income payouts by UK plc, says interactive investor – but can they return to historical levels in the near term?

Dividend payouts fell by 26.7% year-on-year to £12.7 billion in the first three months of this year – the slowest decline since the pandemic began, according to the report.

Richard Hunter, Head of Markets, interactive investor, says: “As we lap the pandemic, which was in full force of this time a year ago, the comparatives are stark as shown in the numbers.

“However, the interesting point is around the direction of travel from here. While it is clear that the worst of the cuts are now over, the question remains as to whether the level of dividend income will return to pre-pandemic levels.

“For example, the banks are still capped as to the levels of the dividend they are able to pay thanks to the regulator, while the oil majors took the pandemic as a good time to cut their cloth and reduce dividend payouts in a massive cost-saving drive.

“These two sectors were previously responsible for the lion’s share of dividend payments in the UK, but the jury remains out as to whether returning to historical levels is on the agenda in the near term.”

Upcoming dividends

Lee Wild, Head of Equity Strategy, interactive investor, says: “It hasn’t been easy sticking with income stocks over the past year, but loyal shareholders will be rewarded with some tasty dividends over the next month. Investors are benefiting from L&G’s new and viable dividend policy, while M&G has confounded the critics by maintaining its very generous payout. Staying invested in some of these dividend stocks could also pay off, particularly Lloyds Banking Group, which is expected to significantly increase the payout over the next year or two.

“And the popular investment trusts, favoured for their ability to put cash by in the good times so they can keep returning it to shareholders during leaner times, distribute another round of dividends shortly.”

Source: interactive investor

Key findings from Link report: 

• Q1 cuts totalled £5.8 billion – about half came from the oil sector
• Headline dividends jumped 7.9% thanks to the second-highest one-off specials on record
• Over the last twelve months, the pandemic caused a 41.6% fall in dividends – cuts totalled £44.8 billion, as two thirds of companies made reductions
• Greater clarity on outlook for banking payouts means Link Group’s best-case forecast for 2021 reduced to £66.4 billion (excluding one-off specials), an increase of 5.6% year-on-year; headline payouts will jump by a sixth to £74.9 billion
• Worst-case sees upgrade thanks to greater visibility. Instead of a 0.6% decline, dividends should rise no less than 0.9% this year on an underlying basis

Kyle Caldwell, Collectives Editor, interactive investor, says: “Signs the Covid-19 dividend drought has potentially come to an end will be particularly welcomed by fund managers that run an open-ended fund with an income mandate. The majority of equity income paying open-ended funds cut their dividends in 2020, due to income drying up from their underlying holdings.

“In contrast, most equity income paying investment trusts (85% in total*) increased or held dividends in 2020. Once again, this shows that investment trusts tend to be a superior option for investors who want income consistency. Trusts can hold back up to 15% of dividends received each year, which means they can build up a reserve to bolster payouts in leaner years. In contrast, funds have to distribute all the income generated by the fund. Therefore, when there’s an income shortfall a dividend cut is on the cards.”

Tom Bailey, ETFs Specialist, interactive investor, says: “It is interesting to note that Link now expects financials to start increasing their dividends. Financials were one largest contributor’s to the huge fall in dividend payments in 2020 – initially due to the economic outlook but also because UK regulators told financials to stop their payments.

“However, according to the Link report, banks should start to increase their payments this year, particularly with the economic outlook improving. Investors in dividend-focused ETFs are likely to have a lot of bank exposure. The Vanguard FTSE All-World High Dividend Yield ETF (LSE:VHYL), part of ii’s Super 60 list, for example, has about 25% weighting towards financials.”

Notes to editors

*Source: Association of Investment Companies.