UK equity income market review: UK dividends show signs of a pickup

Having breached 7,000 points for the first time since February 2020 during April, the FTSE 100 Index rose above 7,000 once again during May amid intensifying optimism over the strength of the economic recovery.


  • Investors’ optimism was tempered by concerns over inflation
  • UK dividends fell by almost 27% YoY during Q1
  • UK equity funds were out of favour in April

Having breached 7,000 points for the first time since February 2020 during April, the FTSE 100 Index rose above 7,000 once again during May amid intensifying optimism over the strength of the economic recovery. Business activity surged in the UK during May, according to IHS Markit/CIPS, which commented: “The UK is enjoying an unprecedented growth spurt as the economy reopens”. However, costs continued to surge:  as demand outstripped supply, prices rose sharply, and IHS Markit warned that inflation could have “much further to rise”.

“57% of UK companies cut their dividend payouts over the 12 months to the end of March”

The FTSE 100 Index rose by 0.8% over May, and by 8.7% since the start of the year. Meanwhile, the FTSE 250 Index posted a monthly increase of 0.8% and a year-to-date rise of 10.7%. The FTSE 100 Index’s yield eased from 3.08% to 3.00% during May, while the FTSE 250 Index’s yield remained unchanged at 1.85%. In comparison, the yield on the benchmark UK gilt ended May at 0.80%.

During May, FTSE 100 insurer Aviva announced that it aims to make a “substantial return of capital to shareholders” once it has completed a programme of disposals. Elsewhere, drinks manufacturer AG Barr intends to reinstate its dividend in the current financial year.

UK dividend payouts fell by 26.7% during the first quarter of 2021 compared with the same period in 2020, according to Janus Henderson’s Global Dividend Index, which found that 57% of UK companies cut their dividend payouts over the 12 months to the end of March. Over the period, Shell – previously the largest dividend payer in the world – cut its payment by two-thirds; nevertheless, Janus Henderson believes that many formerly large payers would take the opportunity to reset payments to a “more sustainable level”. Over the first three months of 2021, less than half of UK companies in the study cut their dividends, and the headline total for the UK increased by 8.1%, boosted by substantial special dividends from Tesco and BHP.

Equities were the most popular asset class during April, according to the Investment Association (IA), and the UK Smaller Companies sector experienced its strongest inflows since its record £279 million in December 2019. In comparison, investors’ appetite for funds in the mainstream UK All Companies sector dropped sharply following a strong surge in March, and demand for funds in the UK Equity Income sector remained weak.