The dividend outlook for income investors

Global dividend picture

Against the backdrop of the global pandemic, companies cancelled dividends in the face of unprecedented economic uncertainty.  However, following a torrid period for income investors in 2020, we are seeing a much brighter picture emerging for dividend pay-outs.

Global dividends jumped 26% higher in Q2 2021 compared with Q2 2020, but there is a great degree of variance in the dividend picture from country to country.

Europe is generating a robust recovery in dividends.  According to the Janus Henderson Global Dividend Index, the recovery has been led by France and Sweden.  Germany lagged behind the recovery to date.

The US market is traditionally a lower dividend payer and last year proved more sustainable as dividend cuts were much lower than that seen in Europe and the UK.  Consequently, dividend growth/recovery this year has been markedly lower from this area.

Asia Pacific ex-Japan region registered a notable rise in pay-outs, driven by the financial sector in Australia and in South Korea via a special dividend from Samsung.

Link’s UK Dividend Monitor reports a 51% jump in pay-outs during the second quarter, as many companies began to reinstate dividends.  On an underlying basis (i.e., excluding special dividends), pay-outs rose 43%.  Janus Henderson said that 85% of UK companies in its index had increased, restated, or held their dividends this year.  We have also seen an increase in share buyback activity in recent months and outside of the main market, AIM listed stocks are also boasting strong dividend growth (56% according to Link’s AIM Dividend Monitor).  Note that AIM dividends fell by nearly 40% last year.

The sector perspective

Mining dividends grew strongly against a backdrop of rising commodity prices in Q2.  Industrials and consumer discretionary dividends were also sources of good dividend recovery.

However, dividends from the leisure sector remained subdued perhaps reflecting the continued uncertainty impacting this area of the market.

The more defensive dividend payers in 2020 were the telecom, food, food retail, household products, tobacco, and pharmaceuticals sectors.  These areas of the market have continued to grow pay-outs, albeit at a lower, more sustainable rate.

Janus Henderson state that banks accounted for half the fall in global dividends in 2020.  Regulatory restrictions have now been lifted allowing these companies to recommence dividends.

What lies ahead?

Dividend cover is an important indicator of the strength behind a company’s decision to pay a dividend.  If dividend cover is below 1, the companies are paying a dividend beyond their profits.  According to AJ Bell’s Dividend Dashboard, dividend cover in the UK is improving and currently sits at 1.83x for the FTSE 100.  This is good news for the sustainability of dividends beyond this period of recovery.

Janus Henderson have upgraded their global dividend forecast for 2021 by 2.2% since their May publication. This results in expected headline dividend growth of 10.7% on a year-on-year basis. They have forecast that global dividends will return to pre-pandemic levels within 12 months.  For the UK dividend market, AJ Bell expect the FTSE 100 to yield 3.7% in 2021 with the total pay-out reaching £76.9bn.  This underlines that the UK remains an attractive market for investors seeking income and arguably it is now stronger and more sustainable shape following a period of rebasement.  Link believe AIM’s dividends can regain their previous highs by in 2023, almost two years sooner than expectations for the main market.

What does this all mean for Five Wealth Investors?

It is very difficult to insulate a portfolio from the sort of dividend cuts we saw last year.  At Five Wealth we have always appreciated the attractiveness of the home market as a source of income (particularly for sterling investors), but also recognised the risk associated with a narrowly led schedule of dividend payers.  Our cautiousness has been made greater in recent years by market concerns around dividend sustainability.  Consequently, we have conviction in a small number of funds to navigate this market, providing a consistent approach to maintaining and growing dividends over time.

One could say that recent years have provided a more attractive (if contrarian) time to invest in UK equities.  Valuations remain attractive on a relative basis because this market has been a largely “out of favour” since the EU referendum result.

Nevertheless, we feel a global approach to dividend investing is favourable.  By combining a blend of dividend sources, diversified globally and by sector, we feel that we can smooth out some of the bumps in the road that might originate from sector-based stresses, political shifts in policy or other unforeseen shocks to the economy.  The UK has historically been an attractive market for income focused investors, as there is a strong dividend paying culture.  However, alongside that dividend friendly backdrop, it is important to consider the level of concentration risk within the UK market. According to AJ Bell’s latest Dividend Dashboard publication, 52% of the forecasted dividends for 2021 is set to come from just 10 stocks.

At Five Wealth we believe that we can work with clients to build an investment strategy that meets their objectives and attitude to risk.  For income investors, this might mean looking beyond the natural income generated by an equity focused investment portfolio, ensuring that there is not a reliance on a single asset class as a source of income and using various products and tactical financial planning to provide “income” from a number of sources and in a number of manners. A diversified multi asset portfolio can be a sensible way to navigate the economic and market turbulence that we have experienced over the past 18 months and the positive but far from certain investment environment that lies ahead.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Changes in the rates of exchange between currencies may affect the value of the investment.

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October 16, 2021 Post by Roisin Duffy
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