The staggering scale of UK dividend cuts in 2020 revealed

Due to their structure, funds will inevitably cut dividends, but trusts have weathered the storm so far. 

Nearly 500 companies listed on the London Stock Exchange have cancelled, cut, or suspended dividend payments since the start of the year.

The research, by GraniteShares, an ETF provider, highlights the dividend black hole that has emerged in 2020. The firm found that 493 companies between 1 January 2020 and 23 November 2020 have taken action on the dividend front to shore up balance sheets in response to the Covid-19 pandemic.

No segment of the market has been immune, 51 FTSE 100 companies, 115 FTSE 250 companies, and 149 AIM-listed companies have cut, suspended or cancelled dividends in 2020.

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Will Rhind, founder and chief executive officer at GraniteShares, points out that dividends and dividend growth play a very important role helping investors achieve sustainable income and long-term returns.

Rhind, however, does not expect dividends to return to pre-Covid levels anytime soon. He says: “The expected slowdown in GDP in the UK and in many other countries in the fourth quarter means that companies may be under additional pressure to preserve cash, which could put further pressure on dividends.  It is likely that investors will face a long wait until they see dividends return to their pre-Covid levels.”

UK equity income fund managers also caution that, while they expect 2021 to be a better year for income investors, dividends for the UK market as a whole are not going to return to 2019 levels. UK dividend payments hit record levels for three years on the spin (2017, 2018 and 2019), with payouts last year coming in at £110.5 billion. 

Blake Hutchins, co-manager of the Trojan Income fund, notes dividends for the UK market in 2021 will be “lower in the future (compared to 2019 dividend levels), but at more sensible levels”. He expects the biggest dividend paying stocks to rebase their dividends, which in turn will result in dividends for the overall market being lower. 

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Investment trusts buck the trend

When it comes to seeking out consistent income performers, investment trusts are a superior option versus open-ended funds. This is because 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 of the income generated by the fund. Therefore, when income dries up, as it has done in 2020, a dividend cut is pretty much inevitable for funds. In terms of how big the cuts will be for UK equity income funds, John Monaghan, head of research at Square Mile Investment Consulting and Research, says he is working off the assumption income distributions could fall by a similar magnitude to the UK market, a drop of around 40%.

In contrast, just under 20% of trusts have cut or suspended dividends this year. This percentage figure is based on figures from broker Winterflood and data from the Association of Investment Companies (AIC).

Firstly, data from Winterflood to 9 November shows that 47 dividend announcements have been made by trusts since the end of March, in which trusts have either cut, suspended or cancelled income payments to shareholders.

Secondly, AIC data from last May showed that 249 investment companies were paying income. Therefore, the number of dividend cuts or suspensions by trusts equates to just under 20% of those that pay dividends.

Moreover, a total of 11 trusts have raised dividends for 40 years or more, and all of these have pledged, or are on track, to keep those records going. If the dividend drought continues for a prolonged period of time, boards will have tough decisions to make, but in the short term, at least, the ‘rainy day’ reserves are being utilised to weather the dividend storm.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.