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Learning lessons from the UK dividends bounce back

UK div8idends bounce back

New research shows that the UK dividend payments rebounded strongly in 2021 but still remains below their pre-pandemic level. The experience of the last two years holds important lessons for investors.

2020 was a grim year for anyone who relied on UK company dividends as a source of income. The total dividend payments from UK plc fell by 43%, taking them just about back to a 2011 level. Unsurprisingly, the Covid-19 pandemic was to blame, with companies rushing to preserve cash and the Bank of England forcing banks to stop dividend payments.

The latest Dividend monitor from Link Group, one of the UK’s leading share registrars, paints a much cheerier picture for 2021, with total dividend payments rising by 46%, Alas, the laws of mathematics do not mean that dividends are now back above their pr-Covid 2019 level – 2020’s 43% decline needed to be followed by a 75% rise to return to square one. Nevertheless, the 2021 dividend payout has returned to a level comparable to about five or six years ago. At the start of 2021, few were expecting such a rapid recovery in dividends; Link’s best-case scenario was for 10% growth, while its worst case was for a further, albeit small decline.

The surge in dividends was helped by a much larger than normal crop of special (one-off) dividend payments, often stemming from company spin-offs or reorganisations. If these are removed from the calculation, underlying (regular) dividends posted a year-on-year increase of 22%.

The bounce back in UK dividends has important lessons for investors:

  • It is a reminder of the dangers of panic selling. Those investors who sold out as dividend payments dried up would have ended up earning minimal interest if they simply left their proceeds on deposit. In theory, they might have reinvested quickly enough to avoid much of an income loss, but in practice, few investors – amateur or professional – are that good at market timing.
  • UK share-based funds now offer an attractive option if you are investing for income. At the time of writing, the average UK dividend yield on a member of the FTSE100 was 3.3%. It will take many 0.25% increases from the Bank of England before deposit rates come anywhere near that level.
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