Having experienced a difficult March, in which share prices plunged and dividends were cancelled, income-seeking investors experienced fresh pain in April as more companies opted to suspend their payouts.
- Over £25 bn-worth of cuts will take place this year
- A further £23.9 bn-worth of dividends are at risk
- Payouts are expected to rebound in 2021
Having experienced a difficult March, in which share prices plunged and dividends were cancelled, income-seeking investors experienced fresh pain in April as more companies opted to suspend their payouts.
“45% of UK companies had scrapped their dividend payouts by the end of the first quarter”
According to Link Asset Services’ Dividend Monitor, 45% of UK companies had scrapped their dividend payouts by the end of the first quarter and, looking ahead, Link confirmed that over £25 billion-worth of cuts will take place this year, with a further £23.9 billion-worth at risk. In comparison, £31.1 billion-worth of dividend payments are expected to remain safe.
While Link’s “best-case” scenario for 2020 sees dividends falling by 27% to £71.9 billion, its “worst-case” scenario shows dividends falling by 51% to £48 billion. A more realistic scenario predicts a drop of between 32% and 39%. The banking sector is experiencing the most pronounced impact, with cuts of around £14.6 billion, whereas the “classic” defensive dividend-paying sectors – for example, food retailing, food, drink & tobacco, and basic consumer goods – appear to be more likely to maintain their payouts. Link acknowledged the necessity for some companies to protect themselves, but warned that newsflow is “sure to get worse before it gets better”; nevertheless, looking further ahead, Link expects dividends to “bounce back next year even under quite bearish scenarios”.
Meanwhile, the Investment Association (IA) urged companies in the FTSE 350 Index that have decided to suspend dividend payments to reinstate them “as soon as it is prudent to do so”, citing the impact of dividend cancellations on savers, pensioners, pension funds and charities. Because so many companies have suspended or cancelled dividend payouts, the IA issued updated guidelines on the criteria for a funds’ eligibility for inclusion in its UK Equity Income or Global Equity Income sectors. The revised criteria – which will remain in place for twelve months – are designed to prevent short-term disruption to the equity income sectors.
During April, the yield on the FTSE 100 Index fell from 5.78% to 5.22% while the FTSE 250 Index’s yield dropped from 4.26% to 3.89%. In comparison, the yield on the benchmark UK gilt declined from 0.35% to 0.25%. The FTSE 100 Index rose by 4% during the month, and the FTSE 250 Index climbed by 9%. Insurers including Aviva and RSA and Direct Line decided to suspend planned dividend payouts following pressure from the Prudential Regulation Authority (PRA).
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