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Can investment trusts survive the UK dividend drought?

A massive fall in UK dividends means it is more important than ever to diversify your sources of income
Can investment trusts survive the UK dividend drought?

UK dividends have evaporated in the past few months, with no imminent recovery in sight. Link Asset Services predicts that UK dividends could fall by between 45 and 49 per cent on a headline basis in 2020 versus the previous year’s total, based on its best- and worst-case scenarios. While Link’s worst-case decline looks less severe than its estimate at the end of the first quarter, its best-case scenario appears less likely than it once did.

The situation could improve once the crisis begins to abate: Link argues that dividends are “likely to rebound quite sharply” in 2021, potentially rising by as much as 29 per cent based on broad assumptions. However, investors reliant on the once high-yielding UK market for income could still face a shortfall. The rebound predicted by Link would still leave 2021’s payments a fifth lower than those made in 2019. Link also says that it could take until 2026 for UK dividends to return to their 2019 level.

As we pointed out in Investment trusts to weather the dividend drought, in the issue of 2 April, open-ended funds can only pay out the income they receive each year and will inevitably offer less than usual in the short to medium term. Investment trusts can top up their dividend payments using revenue reserves, but even these could come under pressure amid a prolonged income slump. So it is worth carefully monitoring how funds you hold or are thinking of investing in are holding up.

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