Things are looking up for income investors as dividend payouts start to rise
UK dividend payouts are ready to grow again, but this crisis has shown why income investors must diversify overseas.


Things are finally looking up slightly for investors who rely on stocks for income. In the first three months of this year, UK dividends fell at their slowest annual rate since the pandemic began, down 26.7% excluding special dividends according to the latest quarterly figures from shareholder registrar Link. That still sounds painful, but the year-on-year figure disguises an encouraging trend: half of all listed companies resumed, maintained or increased their dividends between January and March, compared with just one third between October and December.
The bad news is that dividends fell an unprecedented 43.1% – including both regular and special dividends – in 2020. Even though payouts are recovering and we can expect a decent level of special dividends this year, Link projects that total UK dividends will rise between 11% and 17% in 2021. That will leave them between 33% and 37% below pre-pandemic levels and unlikely to regain previous highs until around 2025.
Investment trusts may yet need to cut
This will mean income portfolios and income funds that were too reliant on a small group of high-yielding stocks, such as banks, oil and gas, and miners (which made up three-fifths of cuts) are going to be paying a lower income for some time. Many income investment trusts are likely to be able to keep raising dividends due to their ability to draw on revenue reserves (see below). But if a trust has to do this too heavily for too long, it will ultimately affect future dividends or capital gains because they will be selling assets. Two trusts have already cut (Temple Bar and British & American) and two have announced plans to do so in 2021 (Edinburgh and Troy Income & Growth). If we face several years of weak dividends, others will have to consider it.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Go global for income
There was a way to avoid this: international diversification. British dividends were very hard hit in this crisis. Even European ones fell by less, down 31.5% before the effects of currencies and index changes, according to fund manger Janus Henderson, with half of that due to banks. Japanese dividends were slightly lower by 2.3% and US payouts were actually up by a similar amount. There were hits to favoured income stocks elsewhere – regulators in Australia and Singapore capped bank dividends – but a diversified global portfolio suffered much less.
Of course, UK dividend yields tended to be higher than the rest of the world, so overseas dividends looked less tempting – but the crisis proved that many of these yields were unsustainable. Investors should not forget this harsh lesson when payouts start to bounce back.
I wish I knew what a revenue reserve was, but I’m too embarrassed to ask
Many high-profile investment trusts have managed to raise their dividend every year for decades regardless of dividend cuts by companies. The main reason for this is that trusts, unlike open-ended investment funds, don’t have to distribute all the dividends they get each year. They can hold back up to 15% to build up a revenue reserve, which they can then draw on to maintain their own dividends in years when company payouts fall.
This can be useful for investors who prefer a steady income from their funds. You could do a similar thing with your own portfolio, by putting aside 10% or 15% of your dividend income to be drawn on only during market crises. However, avoiding dipping into that requires discipline, while having it out of reach inside an investment trust doesn’t present the same temptation.
That said, it is important to understand that a revenue reserve is not a sum of money separate from the trust’s portfolio, sitting in a bank account for emergencies. It is an accounting entry: the money will be invested alongside the trust’s other assets – in stocks, bonds or something else – on which the trust will hopefully be earning income and/or capital gains. Drawing on the reserve means selling assets. Typically the amount needed would be small, but if the trust had a large revenue reserve and had to draw on it for quite a while, the portfolio would shrink by a meaningful amount, which would cut future dividend income.
Following a change to tax laws in 2012, investment trusts are also allowed to pay dividends out of realised capital gains, known as the capital reserve. A few trusts now aim to pay out a flexible proportion of their value each year, regardless of whether that comes from capital or income. Drawing on capital to maintain a fixed dividend could make sense as a one-off in a crisis, but if a trust is forced to draw on revenue or capital repeatedly, the dividend is not sustainable.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.
Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.
He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.
-
How to help your children buy a home
Younger generations continue to struggle to keep up with the pace of increasing house prices. We look at ways you could help your children or grandchildren get on the property ladder.
-
Thousands of estates are sitting unclaimed in the UK – is your family name on the list?
More than 5,700 unclaimed estates are on a government list waiting to be found by living relatives. We take a look at the list, and explain how to make a claim
-
Is Donald Trump putting the US dollar in danger?
Donald Trump's administration sees one of its greatest advantages – the US dollar – as a burden. Gold is the obvious beneficiary, says Cris Sholto Heaton.
-
The British railway industry is in rude health – here's why investors should jump aboard
The railway industry has bounced back from the devastating impact of the pandemic and is entering a new phase of development – and profitability
-
AGMs: a unique selling point for investment trusts that investors should capitalise on
Opinion Shareholder meetings aren’t just a regulatory requirement – they are a way to communicate with investors
-
A cyclical case for UK stocks
Opinion Depressed margins and relatively low valuations mean the UK market could rally strongly as conditions improve, says Cris Sholto Heaton.
-
Infrastructure investing: a haven of stable growth amid market turmoil
From booming construction in emerging markets to digital and green transitions, the infrastructure sector offers security, returns and long-term opportunities
-
The costly myth of “sell in May”
Opinion May 2025's strong returns for US stocks have once again shown that putting too much weight on seasonal patterns will only make investors poorer, says Max King
-
Who’s driving Tesla?
As Elon Musk steps back from government with his eyes on the stars, investors ask if he’s still behind the wheel at his electric-car maker.
-
Investment opportunities in the world of Coca-Cola
There is far more to Coca-Cola than just one giant firm. The companies that bottle and distribute the ubiquitous soft drink are promising investments in their own right.