Dividends – Feeling the pinch

Barry Crawford

Chartered Financial Planner

Dividends are paid out by companies to shareholders, which can benefit direct shareholders and contribute to investment returns from funds which invest in equities, for example ISAs and pensions savings.
In our April edition, Mark Ryan reported that the outlook for dividends was looking bleak. Five months on, Barry Crawford provides us with an update.

How have dividends been impacted?
The impact of the Covid-19 pandemic on dividend payments has been highlighted by recent research from Link Asset Services, one of the leading UK company registrars. It looked at the dividend payments from UK listed companies in the second quarter of the year and found that:
• Total dividend payments, both regular and one-off special payments, fell by 57.2% compared with the same quarter in 2019. If special dividends are excluded – and there were very few – regular dividend payments fell by 50.2%.
• 176 companies cancelled their dividends and 30 more cut them. In total that represented three quarters of the payers in an ‘ordinary’ second quarter.
• Among the 100 largest companies, dividend pay outs fell by 45%, but in the next tranche of more UK-focused ‘mid-cap’ companies, the drop was 76%.

To some degree, the second quarter of 2020 represented the perfect storm. This is when the big banks (Barclays, HSBC, Lloyds, NatWest (formerly RBS) and Standard Chartered) usually pay their final dividends. This year, none of them made a payment, following direction from the Bank of England on preserving capital. Those five alone accounted for half of the decline in regular dividends over the quarter. April to June was also the period in which the dramatic dividend cut from Royal Dutch Shell took effect. For each of the last five years from 2015 to 2019, Shell has been the company which has paid out the largest amount in dividends, but its June 2020 quarterly dividend payment was around one third that of March.

What can we expect in the future?
Implementing dividend cuts in the short-term should help companies prioritise liquidity and solvency in the first instance and better position themselves to recover faster once we move past this crisis. We believe that this longer-term view is appropriate in the circumstances and will likely, in time, make dividend ‘recovery’ more feasible though they may immediately return to the levels they were before the pandemic.

Looking ahead to the rest of the year, Link Asset Services predicts that, at best, the drop in total annual dividend payments will be 39% for regular dividends and 45% for all dividends. For 2021, the report suggests that there could be a rebound of ‘as much as 29%’ in dividends.

How does this affect my investments?
Dividend cuts will of course affect the payments made by equity funds and in particular, UK equity income funds, as these will be derived from the distributions received by the fund. Some funds will be harder hit than others, particularly those that had higher allocations to banks and those companies hardest-hit by the pandemic.. Funds with a managed or a multi-asset approach will offer some protection from dividend cuts as income is likely to be derived from other sources as well, for example, interest payments from fixed income assets.

If you do have any concerns regarding the income which you receive from your investment funds, our advisers can review your income strategy and we can then make recommendations to help you receive the income you need most tax efficiently. Investments should always be viewed as long-term in nature and we would not recommend a knee-jerk reaction to any further downturns.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance. 

CA5711 exp:03/2021

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