For investors, dividend payments can be an important factor in the level of returns achieved. But, unfortunately, 2020 wasn’t the greatest year for the world of dividends.
Cast your mind back to March of last year, and the UK found itself being plunged into a whole host of Covid related economic uncertainty – lockdowns, huge market falls and reductions, deferrals or even cancellations of dividends.
As a reminder, a dividend is simply a portion of a company’s profits that’s divided up among some or all of its shareholders.
With great uncertainty surrounding how the pandemic would evolve, companies took the opportunity to strengthen their capital reserves, rather than transferring it to shareholders.
In March 2020, the Bank of England went as far as directing banks to suspend dividend payments, and Royal Dutch Shell cut its dividend for the first time since World War II. Many other UK companies followed that lead, opting to defer, reduce or cancel income payments altogether.
The tables are turning
Here we find ourselves, a whole 17 months later. There’s still a lot of uncertainty about, but the economic recovery continues to take hold, and investors are finally glad to see that the great dividend depression of 2020 seems to be coming to an end.
Instead, 2021 seems to be shaping up to be the year of the great dividend recovery. According to the Link Dividend Monitor report, across the second quarter of 2021, firms paid out £25.7 billion in dividends – with the biggest pay outs coming from mining, bank, and oil sectors.
Banks in a strong position
Banks – one of the more traditional dividend-paying sectors – look poised to deliver some strong pay outs for the rest of the year. The sector has been boosted by a number of factors, including the Bank of England and European Central Bank lifting restrictions on how much banks can return to shareholders in dividends and share buybacks.
Due to an increase in global demand for commodities, companies that predominantly work in areas such as mining and oil have also seen sustained growth since the initial impact of Covid. This has resulted in these companies being in a strong position to once again reward their shareholders with dividends.
Shell has recovered from its historic dividend cut. Towards the end of July, it raised its quarterly dividend by 38% from the previous three-month period.
There’s more to come
Since the start of the year, FTSE 100 companies have been returning dividends. On average the FTSE is yielding 3% – not too far short of the 4% delivered in 2019. Even better news, according to Fidelity International, this figure is only expected to rise further for the rest of the year, with more companies yet to report their dividend results.
This is particularly good news for equity income funds, which focus on companies that pay higher than average dividends – these will be in a position to offer investors between 4-5% returns. And with the low interest world we find ourselves in, that’s a very good rate.
Dividend cover – something which measures the comfort with which companies can make payments to shareholders – stands at a promising rate of 1.5 times. This means that for every £1 paid out, the company has 50p to spare.
What does it mean for your investments?
Your Skipton investment portfolio is made up of a wide range of investment funds that match your attitude towards risk, and also help to build you a diversified portfolio with a mixture of asset classes – from shares to fixed income, who will either keep the income or often reinvest it back into the fund. If a fund you hold invests in shares, they will receive dividend payments.
When you invest into an equity fund, dividends usually get paid into the fund and the price of the fund increases accordingly. If you’re automatically in an income fund, the fund manager will pay the dividend income out to the investors. These types of funds usually have ‘income' in their name.
An ‘accumulation’ fund on the other hand, is designed to offer you growth in the fund rather than income – so any income generated will be reinvested within the fund, raising the value of your investment.
Kieran Ellis – Skipton’s Technical Research Specialist, “2020 aside, dividends are one of the very few stabilities in investing – they are consistent, irrespective of the change in share price and market movements, as they can cushion losses when share prices decline.
“Dividends can be the secret weapon of an investment portfolio. And the good news is that, for the short-term, things are looking positive – with an improving economy and growing company profits. For example, NatWest have said it will return £3bn to shareholders through dividends and share buybacks over the next three years.”
But as always, it’s important not to get too carried away. It’s likely the level of increases in dividends we’re currently seeing will only be short-term.
Kieran adds, “As with all things investing, dividends too should be approached with a long-term view. Over many years, dividends can make up a considerable proportion of total investment returns – and provide some protection from market falls."
We will no doubt update you on how dividends continue to play out in your October Quarterly Report.
Get in touch
As always, if you have any questions about your investments please get in touch with us on