Dividend cuts have defined the investment landscape during 2020 as traditional income stalwarts were forced to cut or suspend dividends during the Covid-19 pandemic. And while payouts are unlikely to return to pre-pandemic levels, the outlook for 2021 should be more positive as the global economic recovery takes hold.
One of the worst-hit areas for dividends was the UK, which has a reputation as one of the highest yielding markets in the world.
FTSE 100 payouts this year are forecast to drop by 20 per cent – or £14.7bn – to £59.9bn, according to investment platform AJ Bell’s ‘Dividend Dashboard’.
In total, 53 current or former members of the FTSE 100 index have cut, deferred or cancelled over £37bn of dividend payments in 2020 as a result of the Covid-19 outbreak and subsequent recession.
However, the outlook for 2021 is more positive with dividend payments forecast to increase 18 per cent – or £10.9bn – to £70.8bn.
This puts the FTSE 100 on an expected dividend yield of 3.2 per cent for 2020 and 3.8 per cent for 2021, according to AJ Bell.
“There is no doubt that 2020 has been tough on income seekers,” said Ross Mould, investment director at AJ Bell. “Yet the news flow is starting to improve, 16 FTSE 100 firms have either returned or declared their intention to return to the dividend list for fiscal 2020.”
2021 Dividend forecast
Source: AJ Bell
He continued: “The total dividend payments made or announced by those 16 add up to £2.7bn with four yet to finalise the actual figure. That £2.7bn figure is still dwarfed by the value of the cuts announced in 2020 but it nevertheless underpins the improved momentum in overall FTSE 100 dividend forecasts.”
Yet, Laura Foll – manager on the Janus Henderson UK Equity Income & Growth fund – said the trajectory of dividend payments in the UK is reliant on the Covid-19 vaccine rollouts and resolution of a trade deal with the EU.
“Dividend payments, while based on historical earnings, are a signal of confidence in a company’s future outlook,” said Foll. “If by the time most final dividends are announced in the spring there is a Brexit deal agreed and the vaccine is being administered at pace, this should inject some confidence into British boardrooms and dividends may likely benefit from this.”
UK dividends full-year basis including 2021
Source: Link Group
Indeed, for 2021, Link Group pencils in a preliminary best-case increase of 15 per cent and a worst case of 6 per cent taking payouts back to levels last seen in 2012 and 2013.
Nevertheless, UK investors might want to diversify and look elsewhere for equity income next year.
“One of the most important lessons that the pandemic has highlighted is the importance of diversification,” said Quilter Investors portfolio manager Helen Bradshaw. “Not only can this help protect your investment returns when markets are volatile, but it can also increase your portfolio’s resilience in times of stress.”
Indeed, RWC Partners’ head of European distribution Gary Tuffield said there is ample opportunity in growth stocks heading into next year.
“With companies cutting or withholding dividend payments, many financial headlines suggested that this it was the final nail in the coffin for income investing,” said Tuffield. “We emphatically disagree with this. The power of compounding a sustainable dividend has proven to be a successful investment strategy for more than a century.”
This is what encouraged RWC to launch a global equity income strategy – TM RWC Global Equity Income – managed by veteran stockpicker Nick Clay earlier this year.
“With growth stocks approaching peak multiples and interest rates anchored at all-time lows we believe that a tried-and-tested global equity income approach looks very appealing to large swathes of the industry and end consumers,” said Tuffield.
And for individuals with greater risk tolerance and willing to consider other areas there could be even greater opportunities in some overlooked areas.
“Look to Asia for emerging income opportunities,” said Omar Negyal, co-manager of JP Morgan Global Emerging Markets Income Trust. “2020 has been a difficult year across the board but there are reasons to be optimistic.
“In Asia, we have seen a strong policy response and corporate balance sheets remain intact and our key income ideas are in technology, consumer staples and financials.”
However, Quilter Investors’ Bradshaw said income investors who have endured the difficult backdrop of 2020 must prepare themselves for continued uncertainty next year.
“Whether that’s a potential move to negative interest rates, or how long it may take for companies to restore their dividend policies in a fragile economy,” said Bradshaw.
“A coronavirus vaccine would help countries to return to normality, which would ultimately be positive for earnings and in turn dividends.”