Renaissance - Redefining Research

A dividend is the distribution of corporate profits to eligible shareholders at a level deemed appropriate by a company's board of directors. There are two types of payment date, depending on the dividend; final dividends paid annually, at the end of the financial year, and interim dividends paid throughout the year – monthly, quarterly, or semi-annually. Why do companies pay dividends? To reward shareholders and to entice more investment with the aim of keeping their existing shareholder base loyal and bringing in new investors.

In 2020, as Covid-19 hit our shores, dividend payouts were hugely affected, and dropped to the lowest levels in the last decade. £48.7 billion less dividends were paid in 2020 compared to 2019 as businesses cut payments to conserve cash, struggling to ride the force of the coronavirus wave. The pain was felt across all sectors but particularly in banking and mining.

What happened in 2021? Last year’s total payments came in 46% higher than 2020 with a shortfall of 17% compared to the 2019 figure. The sharp recovery was due to a return to payouts alongside economic recovery but was also down to a change in distribution policy with a record number of oneoff dividends paid out, particularly from mining companies, as a direct result of the acute rise in commodity prices.

The big question now is – what can we expect in 2022? Looking forward, there’s a lot of uncertainty over what will happen with dividends during the year. Although traditional sectors such as banking, telecoms and oil continue to grow their dividends, one-off, special dividends are less likely to be paid out, meaning that the 2022 figure will probably be lower overall than last year. On top of this, the tax rate applicable on dividend payouts is set to rise by 1.25 percentage points as the UK government scrambles to raise funds for our health and social care services, translating to even less take-home for investors.

What else could affect dividend payouts? Any uncertainty among the big dividend payers will have a significant impact and if one, or several of the big dividend payers are taken out of the pool completely, the overall totals could take a serious hit. BHP (Broken Hill Properties), Glencore, Shell and HSBC pay out anything from £450 million to £1.5 billion to their shareholders in a single quarter. Their removal from the pool could drastically affect the totals and with Britain’s third largest company, BHP, de-listing from London to focus on their Australian listing, the overall figures for 2022 are already set to nosedive.

For dividends in the UK, it’s looking like the hope of a steady return to pre-pandemic levels isn’t on the cards, but what about payouts across global markets? The broader spread of companies and sectors has meant that dividends didn’t fall as much in 2020 and the recovery in 2021 has been steadier. In aggregate, global dividends were only around 3% lower than the peak in 2019 and are within reach of recovering fully from the damage caused by the pandemic.

Where does this leave dividend-seeking investors? When it comes to the UK, they could consider looking further down the cap scale where there’s less uncertainty and dividend growth remains strong. Mid-caps (companies worth £1 to £5 billion) have seen a much stronger cyclical return to growth of their dividends as the economy has re-opened with dividends increasing by approximately 40% in 2021, more than double the pace of the FTSE100 companies.

Another consideration is for investors to focus less on the UK and broaden their exposure globally where dividends haven’t been as badly affected and can provide a more consistent yield. Alternatives, such as infrastructure, music royalties and special situations can also offer equity income. Alternatives have been steadily growing over the last few years, they offer a good source of income and a good yield. The only downside is the uncertainty over how steady their income will be over a longer time frame.

It’s been a bumpy ride when it comes to dividends and the UK may now be considered a less attractive investment option with the expected lower rate of future payouts, but for investors seeking equity income, there are always other areas to consider and alternative avenues to explore.

"£48.7 billion less dividends were paid in 2020 compared to 2019 as businesses cut payments to conserve cash, struggling to ride the force of the coronavirus wave. The pain was felt across all sectors but particularly in banking and mining."