Dividend investors face years of income devastation

Shell oil tanker © Shell oil tanker © Shell International Ltd

Income seekers will have to look beyond compromised high yielders, such as Shell, in future

(Image credit: © Shell International)

published 24 July 2020

“British stocks have slashed dividends with unprecedented speed and ferocity,” says Link Group. Its Dividend Monitor shows that payouts to shareholders tumbled by 57% in the second quarter. British firms paid out £110.5bn last year, but Link Group says that figure will fall below £61.6bn for 2020. Payouts may only return to their 2019 level in 2026. This year has dealt a “bitter blow to millions of pensioners”, says Matt Oliver in The Mail on Sunday.

Those who don’t need dividend income straight away are also worse off. The annual Barclays Equity Gilt study is a reminder that reinvested dividends are crucial to long-term returns. Without dividend reinvestment, £100 invested in UK equities at the end of 1899 would be worth just £193 today, adjusted for inflation. With payouts reinvested, that figure jumps to £35,790 in real terms. The dividend pain is overdue, says Jonathan Jones in The Daily Telegraph. British income shares “have the least amount of dividend cover of any other market in the world”, according to Henderson International Income Trust. The average global company made 2.1 times as much profit as it needed to cover dividends last year, but the British figure was below 1.5. Firms with dividend cover below 1.2 are particularly likely to cut payouts. The London market contained 57 such “dividend traps” at the start of the year.

This year’s payout pain could pave the way for a healthier investment culture, says Iain Wells of Kames Capital. The rebasing of dividends frees up the funds that one-time dividend stalwarts need if they are to invest in fresh opportunities. As for British income investors, instead of crowding into a “narrow set of compromised high yielders”, such as Shell and BT, they will now need to explore the full breadth of the market.