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Back to dividends as normal

2020 was a painful year for income investors. As the pandemic tightened its grip on the world and shut down economies, companies fled for cover. By the end of Q2 2020, three quarters of all the UK companies that had been expected to pay dividends in the three-month period had cancelled or cut them according to Link. In that one quarter, dividend payouts fell by more than 50 per cent, the biggest quarterly fall on record.

The worst hit sectors were financials, consumer discretionary and resources and commodities. As demand for oil slumped, long standing dividend stalwart Shell chopped its dividend by 66 per cent, the company’s first cut in about eight decades. Although defensives didn’t bat an eyelid, and payments from big pharma and tobacco carried on uninterrupted, the rug was well and truly pulled from under income investors. Dividends are one of the defining features of the UK stock market and in the pre covid world, UK dividend payments followed a pattern of seemingly inexorable increases, as they rose from £63bn a year in 2011 to more than £112bn in 2019.

Now, one year on, dividends have bounced back, and we have revisited our annual assessment of the UK biggest dividend payers in our Income Majors special. Link recently reported that payouts from almost every sector have risen year on year, and that overall Q2 dividends (including specials) jumped 51 per cent - considerably more than the 31 per cent it had pencilled in. Janus Henderson which monitors global dividend trends has reported a similar strong rise as companies around the world also restarted payments. In Q2 European dividend payments rose more than 66 per cent on the same period last year.

Companies have been able to resume payments either because their early worst fears in terms of the impact on earnings and profits did not materialise, or because they are reaping the rewards of the economic rebound and are positive on the outlook even while harbouring concerns about growth slowing in 2022. Howden Joinery for example restarted its payments (and share buybacks, which had also been paused) with a special dividend following a strong first half this year compared to H1 2020 with revenues up almost 70 per cent, and also compared with the same period in 2019 (the recent half was 20 per cent better). Other companies have returned to health with the help of furlough schemes and government loans, or have shored up their balance sheets through a wave of equity and bond issues in 2020. 

So here’s to a return to dividend normality. Except this isn’t of course the end of the dividend crisis. Link reckons it will take until 2025 for payouts to regain their pre-pandemic highs, and the oil sector will be much slower - oil dividends are still at one third of their pre pandemic peaks. We have not yet returned to full economic health (see Arthur Sants’ report on insolvencies) and inflation and pandemic-linked tax rises might yet bring pounding headaches for income investors.

What lessons have investors learnt? We’ve had a sharp reminder that nothing is certain or guaranteed in investing, and while the ability to pay dividends can be interpreted as a sign of a healthy business, that’s not always the case. Attention must be paid to a company’s underlying strength, dividend cover and prospects, as we explored in a recent Analyst column (Fool’s Gold and golden nuggets). I’d also recommend Algy Hall’s brilliant article Kick the dividend habit in which he argues investors should try to think more in terms of total return. That’s because some companies can get caught in the trap of paying a dividend when they could be doing something better with the money and this  can be especially true of mature companies with high and rising debt piles but reputations as dividend stalwarts.