With recent dividend payouts from companies faring well through the pandemic, is the future bright for UK dividends?
The return of UK dividends
Dividends were one of the hot topics in 2020 after unsurprisingly companies across the board slashed pay-outs in order to protect cashflow during such uncertainty. We saw pay-outs from banks effectively blocked and oil majors cutting for the first time since the World War. UK dividends dropped by roughly 45% in the year but now we are ‘hopefully’ past the worst, the focus has returned to when and in what quantity will dividends return.
As it stands, the UK market is still one of the main hunting grounds when it comes to dividends. Looking at the FTSE 100, its current yield stands at around 3.2%, with forward projections reaching 4%+ in the next few years which is higher than most of its international counterparts. Historically, the largest contributor to dividends has come from the oil majors however, as a result of the crisis this dynamic has changed, with the mining sector now taking the helm, accounting for around 18% of total dividends after a strong pay-out from BHP.
The mining sector has been positioned well throughout the pandemic. For some of the big players such as Rio Tinto, previous restructuring has enhanced flexibility and cost-efficiency which has certainly helped throughout the pandemic. Furthermore, the quick Chinese recovery supported demand particularly for iron ore in Rio Tinto’s case, which saw healthy price increases throughout the year. As a result, the miner reported a 20% rise in profits and is set to pay out a record dividend for the year in the region of £4.7bn.
Aside from mining, banks are also set for a comeback now that the BOE has lifted restrictions on dividends. Earnings season is starting, and investors will be eagerly anticipating results. All five of the major UK banks are expected to announce dividends for 2020 with combined predictions somewhere around the £5bn mark. In 2021, this is expected to increase. However, investors should be wary regarding the possibility of negative interest rates as warned by the BOE, and further loss provisions which may continue to restrict profitability moving forward and could ultimately drag dividend growth.
In summary, there has been positive news in recent weeks with companies that have fared well through the pandemic thus far, rewarding investors with relatively large pay-outs considering the difficult climate we are in. However, investors should acknowledge the risks that the pandemic has highlighted, meaning if more bumps in the road to recovery are ahead of us, dividends will be the first to go.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.