It has been a very dismal period for UK income investors, but there might be cause for optimism in the face of gloom.
- In Q2 2020, dividends dropped more than any quarter on record.
- Not all businesses have cut their dividends as a result of financial pressure
- Dividends are already being reinstated by some companies.
Latest figures on UK dividends reveal bleak reading: in Q2 2020, payments fell by a brutal 57.2% to £16.1 billion. 206 businesses have either cancelled or slashed their dividends, which is almost three-quarters of those who would typically pay at this time of year. Across 2020, dividends are expected to drop by more than £48.9 billion (source: Link Asset Services).
A drop of this scale has not been seen before. The worst quarter (Q1 2009) of the Global Financial Crisis had two-fifths of businesses slash their payments. Of those, only half cancelled these payments absolutely. Approximately 85% of companies cancelled dividends in this quarter. The UK stock market has long been regarded as one of the most reliable dividend markets in the world. This is now up for debate.
In the middle of all this darkness, though, there is some relief. About half of the dividend reductions in the second quarter came from financial and banking stocks. The Bank of England compelled the banks to postpone all dividend payments for 2020 and pressured insurers to follow the same path. In this situation, dividends have not necessarily been cancelled because the banks are struggling financially.
Furthermore, several businesses have reduced dividends just as a precautionary step to preserve capital in an increasingly unpredictable period. Equally, several businesses have cancelled dividends for ‘political’ reasons: corporations who have furloughed employees and are receiving government support, for example, do not want to be seen to be paying dividends to their shareholders. Businesses who are cutting dividends due to severe financial pressures are only part of the explanation.
Even then, the companies which have cut dividends due to financial hardship are clustered in particular industries. The energy industry accounts for a large proportion of this. Shell’s dividend cut, coupled with smaller oil producers, amounted to £2.2 billion of the reduction. Retail and leisure businesses have struggled as well.
Outside of the mainstream, dividends are now being re-established as the forecast for earnings grows clearer. For example, Land Securities, announced it will re-start payments in November. The next earnings season is underway, so the outlook for dividends should be clearer from here.
It has been the worst time for UK dividends in history and it has certainly revealed the weakness of some companies’ distribution approaches. However, investors with well-managed and diversified portfolios should be able to weather the storm. For more information about building an investment portfolio for generating passive dividend income, please do not hesitate to contact us on our website or call 01284 701271.
