UK dividends may not recover until 2025

In rather bleak news last week, the latest UK Dividend Monitor from Link Group suggested that UK dividends may not regain previous highs until 2025 at the very earliest. Eight years of growth was wiped off UK dividends in 2020, with two thirds of companies cancelling or cutting their dividends in response to the pandemic lockdowns*.

Headline dividends fell 44% to £61.9bn over the year – the lowest annual total since 2011* – despite a stronger than expected fourth quarter, which saw a number of companies such as Sainsbury’s and Ferguson restore pay outs they had suspended earlier in the year.

The timeline to recovery is back-up by data from Schroders. Its analysis of nearly 150 years of data on the US stock market shows that bear markets for dividends have historically lasted much longer than those for bear markets for total returns (growth and income): 4.8 years compared with 1.5 years, on average. This is because share prices react in advance of economic improvement, whereas dividends don’t pick up until after companies’ financials improve.

So what can income investors do?

A handful of UK equity income funds have managed to do better than the market when it comes to dividend cuts. Rathbone Income and TB Evenlode Income on the Chelsea Core Selection have seen their dividend pay-outs fall by a much lower 20-25%, for example.

But with different countries around the world recovering at different paces, now may be an ideal opportunity to diversify income holdings abroad, with a global equity income offering.

Figures from Guinness Asset Management show that the MSCI World Index dividend fell 12.3% in 2020 and is expected to recover to 2019 levels some time in 2022.

While Europe and Australia have been almost as badly affected the UK, Asia, emerging markets and the US have been proving more resilient. The S&P 500 dividend was actually slightly higher than 2019.

The new, more transmissible variants of the virus, combined with varying success of the vaccination programmes across countries, do point to potential delays to global economies opening up.

So while the near-term outlook has deteriorated, a cautious approach looks the most sensible right now. This, coupled with the added diversification and potential for greater growth, makes global equity income funds an attractive proposition in this climate.

Five global equity income funds to consider:

Fidelity Global Dividend

When considering potential investment opportunities, the manager of this fund places a large emphasis on the sustainability of the dividend and whether the current share price provides an adequate margin of safety. He invests across a variety of sectors and geographies, offering a good level of diversification, and manages risk conservatively, focusing on firms with predictable, consistent cash flows and simple business models with little or no debt on their balance sheets.

Guinness Global Equity Income

This fund aims to provide investors with both income and capital growth. The portfolio typically consists of around 35 equal-weighted stocks, which the managers aim to hold for three to five years. They focus on how well, and how consistently, a company can use money to generate returns. They also have substantial freedom to entirely avoid countries and sectors they don't like.

M&G Global Dividend

Unconstrained by a target income yield, this fund invests in a diversified group of companies with the aim of delivering a rising yield and a good total return in the future. To do this, manager Stuart Rhodes splits the sources of his dividends into three categories – quality, disciplined companies with reliable growth; cyclical companies with a strong asset base; and those experiencing rapid growth from either a product or geographic area.

TM RWC Global Equity Income

This newly launched fund has adopted a similar philosophy and investment process to that used very successfully by the manager and his team when they managed the BNY Mellon Global Income fund (previously the Newton Global Income fund). Investing in 40-60 stocks it will be broadly diversified across sectors but could be materially underweight or completely omit a number of sectors if they are deemed unattractive.

Chelsea clients wishing to invest in this fund will be pleased to learn that they can benefit from a lower fee: the ongoing cost for Chelsea clients is 0.7% (reduced from 0.91%).

Find out more here.

TB Evenlode Global Income

The managers of this fund aim to balance the income received today with future dividend growth. They take a long term approach, focusing on quality, cash-generative businesses. They define quality companies as those with three characteristics: asset-light business models; high barriers to entry which can’t be disrupted easily; finally, their customers’ decision to buy their product or service should not be determined completely by price.

*Link Group UK Dividend Monitor, Q4 2020

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.

Published on 22/01/2021