Dividends dive – and some may never come back

More than a third of British companies have cut or scrapped dividends, and there will be more pain ahead. 

Reinvested dividends are key to long-term returns. Unfortunately, there will be a lot less income to go round this year. About 40% of British companies have cut or scrapped dividends, including Shell and there is likely to be more pain ahead. 

The dividend axe could cost pension funds and income investors nearly £85bn in lost income over two years, says Hugo Duncan in the Daily Mail. Almost half of UK dividends could be cut this year, implying a fall in overall payouts to £47.2bn for 2020. The US preference for share buybacks gives corporate America more flexibility when it needs to hoard cash, but Europe’s dividend payers have no such luck, says Mark Peden of Kames Capital.

British firms rank “in the bottom quarter for dividend prospects” because of the FTSE’s over-reliance on the hard-hit financial and energy industries. The service sector is also in a bad way: will businesses such as M&S and Carnival “ever pay dividends again?” British boards are not letting a good “crisis go to waste”, says Fundsmith CEO Terry Smith in the Financial Times. Earnings should be about twice dividends if payouts are to be sustainable. Yet earlier this year some top UK dividend stocks were barely covering payouts. “Smaller and more sustainable” dividends could be the new normal. 

Executives who regard Covid-19 as cover for overdue dividend cuts are being short-sighted, says Jeremy Warner in The Daily Telegraph. Companies use stockmarkets to raise capital, but investors will be loath to pay up in the future if they think the dividend is not secure. A broader problem is that British income investors are far too reliant on the fortunes of declining industries such as oil. The FTSE is full of “mature, income paying stocks” but relatively few young and exciting “growth companies”.

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