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Fund managers look for bright spots amid gloomy UK dividend figures

DividendsThe annus horribilis that was 2020 in which payouts from UK companies were slashed by more than 40%, could be a positive development if it leads to a more sustainable dividends market, according to UK fund managers.

The idea of a positive reset for UK dividends was part of a cautiously optimistic response to the latest dividend figures. While managers acknowledged they are the lowest since 2011, they also pointed to signs of a slight recovery in Q4 and the hope that the vaccine rollout will spark a recovery in both earnings and dividends over the next year and beyond.

According to the UK Dividend Monitor produced by Link Group, UK dividends fell by 44% in 2020 to £61.1 billion, effectively wiping off eight years of growth.

The headline dividend figures were the lowest since 2011. Unsurprisingly, Covid-19 accounted for £39.5 billion of the cuts with 67% of companies either cancelling or reducing their dividends between Q2 and Q4.

Link’s figures also show that the financial services sector was by far the most affected sector in 2020 with £16.6 billion of dividends either cut or cancelled between April and December, equivalent to two-fifths of the Covid-related cuts. 

The restoration of suspended pay-outs late in the year led to a better than expected performance in Q4; however Link is forecasting that headline dividends will rise by just 10% in a best-case scenario in 2021. Furthermore, Link does not expect UK dividends to recapture previous highs until 2025 at the very earliest.

Fund managers highlighted the Q4 figures as grounds for cautious optimism. David Smith, portfolio manager of Henderson High Income Trust said the data for the last quarter showed “a glimpse of better times ahead” with more companies likely to return to the dividend register in 2021.

But he added that this return will be at low levels during 2021 and significant dividend growth will not be seen until 2022 with companies remaining cautious until there is “a clearer path for cash flows to recover and balance sheets to be repaired”.

Simon Young, manager of the Axa Framlington UK Equity Income fund, pointed out the headwinds that remain in 2021, including the Financial Conduct Authority’s rules on bank dividends. But he remained optimistic that the growth in pay-outs may reach between 5% and 10%.

Meanwhile, Adrian Lowcock, head of personal investing at UK investment platform Willis Owen cited the benefit of a dividend reset during 2020.

“Dividends had become unwieldy before last year, but now investors should be reassured that going forward, dividends from companies will be more sustainable, whilst dividend growth could easily surprise if the economic recovery is more robust than expected.”

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