The second quarter of last year was a grim time for investors seeking income. Flattened by the first wave of Covid, companies responded by hoarding cash—dividends declared between April and June by the UK’s 350 biggest listed businesses fell almost 60 per cent compared with the previous year. Three-quarters of those expected to announce a pay-out either cancelled or cut it, delivering the “biggest hit to dividends in generations,” according to Link Group’s UK Dividend Monitor.
Some had no choice. Banks were ordered to stop paying by their regulator, causing 40 per cent of the drop. Another fifth came from cuts by BP and Shell thanks to the oil price collapse. Property companies hit trouble as rents abruptly stopped.
A year on, how do things look? There’s a long way to go: Link expects it to be 2025 before the full Covid dividend shortfall is made good. This year the second quarter (historically the most important for dividend declarations) is expected to see a recovery. But unless and until the traditional big payers—banks and oil companies—return to their old ways, there are few obvious replacements. Though it generates fewer headlines than a share price crash, a collapse in dividends matters. It affects more than investors’ short-term income. Historically, these payments have accounted for a large proportion of the total long-term return from equities, thanks to the benefits of compounding—reinvesting dividend income to acquire more shares to generate more income. If the income stops, so does the compounding.
What should investors do? Housebuilders offer one bright spot, thanks to continuing state subsidies for home ownership. Another hot theme for investment trust launches recently has been “alternative income”—everything from windfarms to logistics warehouses and music royalties. Yields are good—often 4-5 per cent—but the risks are idiosyncratic. Demand for renewables must grow, for instance, but subsidies are falling. My sense is that it is getting harder to secure high yields from wind energy.
The income portion of my portfolio is now concentrated in property-related trusts, based on the notion that rents will remain fundamental to the way we do business and are likely to recover gradually from here. Meanwhile, shares in many property trusts are trading well below the value of their estates. That is a reasonable set-up for someone seeking income, which I will reinvest in more of the trusts’ shares to compound any gains.
