Dramatic rebound in UK dividends in 2021 – but the pace of recovery is set to slow in 2022

UK dividends finished 2021 in significantly better shape than 2020, jumping by 46.1% to £94.1bn on a headline basis, according to the latest Dividend Monitor from Link Group.

This took the total paid back up to mid-2017 levels. Frothy one-off special dividends boosted the headline total by a record £16.9bn, three times their normal level. Beneath the surface, underlying payouts (which exclude specials) rose more modestly, up 21.9% to £77.2bn in 2021, close to 2015 levels.

The second and third quarters saw the strongest rebound, reflecting the challenging conditions in the corresponding quarters of 2020. Q4 underlying growth slowed to 13.5%, but a large special dividend from DMGT took the headline total to £14.1bn, 26.1% higher year-on-year.

It was a very unbalanced year with excessive dependence on mining companies, whose booming profits meant payouts were three times larger than the long term average. Together they accounted for almost a quarter of the UK total last year, and were by far the biggest contributor to the year’s increase in dividends overall. The second most significant driver of growth was the restoration of banking distributions, but many sectors were able to refuel their payouts more quickly than seemed likely in January 2021 when the pandemic was in a peak. The large and diverse industrials sector stood out with 59.8% growth, though its payouts remain a quarter below pre-Covid-19 levels.

Airlines, leisure and travel, decimated by the pandemic, cut distributions by four fifths for the second year running, while oil dividends were lower because reductions in 2020 took place later in the year. Telecoms was the other main casualty thanks to the cancellation of BT’s distributions. Typically defensive sectors (such as food, basic consumer goods and pharma) held payouts flat.

2021 saw dividends rebound twice as strongly among mid-caps (+40.1%) than the top 100 on an underlying basis (+20.0%). Growth among smaller companies was faster still. Mid-caps benefited from cancelled dividends being restored and the cyclical upswing to which they tend to be more sensitive. By the end of the year, underlying dividends from the top 100 had returned to 2016 levels, but despite their big rebound, mid-cap dividends ended the year no higher than mid-2014 (and at the same level as 2007 and 2008).

Ian Stokes, Managing Director, Corporate Markets UK and Europe said: “The recovery in UK dividends is not complete, but the easiest part of the catch up is now behind us. 2022 faces a number of headwinds in the form of omicron disruption, inflation, and tax hikes and that adds uncertainty to our forecast.

“As the pandemic continues, it would be easy to take a knife to our expectations for dividends for the coming year. We are, however, cautiously optimistic that most sectors can deliver growth.

“Banks and oil companies should be the main engines of progress in 2022. Mining companies can neither sustain this pace of increases nor likely repeat special dividends of this size. We are hopeful that their regular dividends are supported, however, given relatively firm commodity prices.

“The proposed imminent departure of BHP from London will help restore some balance to the UK index. The dominance of big mining groups has overshadowed the income generating capacity of the broader market and left UK payouts too heavily dependent on a single, highly cyclical sector.”

‘Despite these headwinds there will be underlying dividend growth for the market, albeit more muted than last year’

The below commentary from David Smith, fund manager of Henderson High Income Trust, is in response to the latest Link Group UK Dividend Monitor, which found that UK dividends soared in Q4, recovering 46.1% to £94.1bn.

David Smith, fund manager of Henderson High Income Trust comments: “There are a number of short term headwinds for market dividend growth. Commodity prices have now fallen from their elevated levels, meaning total dividend payments from miners will likely be lower in 2022, and GlaxoSmithKline has signalled a reduced dividend payment post the spin-off of its Consumer Health division. Despite these headwinds there will be underlying dividend growth for the market, albeit more muted than last year, as dividends continue to recovery, while the headline yield on the market is still attractive at 3.5% especially relative to global indices, bonds or cash. Also for the selective investors there are pockets of strong dividend growth from companies in the mid-cap area of the market who are adept at negotiating current cost pressures.”

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