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A dividend renaissance?

For financial professionals only

After over a decade of growth investing, what role do dividends play? And do investors still rely on them? For the most part, we can safely say there’s a generational preference. While younger investors are likely to have a greater focus on growth, more mature investors need income to support their retirement. And the last couple of years have been challenging. Dividends fell significantly in 2020 and, while there was a slight improvement in 2021, they haven’t fully recovered.

The Covid effect

2020 was an extraordinary year with cuts and cancellations to dividend payments across the globe. A study by Janus Henderson shows that one in eight companies cancelled their pay outs altogether and one in five reduced their 2020 payments. Of these, banks accounted for a third of the global dividend reductions, more than three times that of the oil producers, the next most affected sector.

Dividend cuts were most stark in the UK and Europe. Together, they contributed to more than half the world’s cuts, not helped by guidance from regulators to cancel bank dividends. Given the more disciplined dividend paying cultures in this region compared to other parts of the world, it’s not surprising that pay outs in the UK and Europe fell below levels seen in 2009.

Onwards and upwards

Although 2021 began with a lot of uncertainty, by the end of Q3 2021, 90% of companies globally either raised their dividends or held them steady. This might sound like a lot, but this recovery came from a much lower starting point. As shown in the chart below, it’s clear that some of the worst affected areas have yet to recover to 2019 levels.

Source: Janus Henderson, data to 30th September 2021

The chart shows that in the UK, dividends have spiked back up, but not to previous highs. In Q3 alone, dividends rose by 89.2% on a year-on-year headline basis, helped by large one-off special dividends according to the Link UK Dividend Monitor report. In this instance, mining companies were responsible for most of the pay outs, accounting for £1 in every £4 of UK dividends in 2021. If we strip out special dividends, the underlying dividends rose by 52.6%.

Outlook for 2022

A recovery in dividends is welcomed. However, there are some headwinds at play. The new Omicron variant is creating further uncertainty, and businesses that were looking to pay out may now hold off in fear of more restrictions. Some companies may choose to let their earnings grow and reinvest in their businesses to bolster balance sheets rather than pay dividends.

Additionally, a large proportion of the dividend recovery has been in the form of special dividends. These are often one-off payments, and these may not be repeated in 2022, particularly if the economic outlook worsens. Then there’s evidence suggesting that the mining companies, some of the biggest payers from 2021, may not be able to sustain their dividends due to falling industrial and precious metal prices such as copper and iron ore in 2022.

This paints a bleak picture, but it’s important to remember it’s specific to certain sectors or businesses. Providing the Omicron variant doesn’t dent the progress made so far, there are other sectors, such as the banks, where we may see pay outs continue to rise. Overall dividend growth is expected to rise, although not by the same levels seen in 2021.

We’re big advocates of diversification. Investing in a single strategy or style carries its own set of risks such as higher volatility, larger drawdowns and indeed risk to dividend cuts. By diversifying across several different asset classes, a portfolio is more likely to deliver a smoother pattern of risk adjusted total returns.