Dividend shares took quite the beating in 2020, courtesy of the pandemic. With lockdowns disrupting businesses, countless companies cut, or suspended, payments to shareholders. The result was a 42.9% decrease in total UK dividend payouts.
When 2021 came around, the resurgence of cash flows allowed many stocks to resume their dividend policies. And subsequently, a good chunk of 2020’s decline was reversed. Yet looking at the latest data for the first quarter of 2022, it seems this recovery was short-lived, with a 24.9% drop in dividend payouts. What’s going on? And why is now actually an excellent time to buy UK dividend shares?
Taking a closer look at the numbers
Despite what a near-25% decline would indicate, dividend shares have started 2022 in tremendous health. According to the Dividend Monitor report by Link Group, FTSE 100 companies have increased payouts by 12.8%, while FTSE 250 stocks delivered an impressive 30.5% boost. But if payouts are rising, then why have overall dividends dropped by double-digits?
In 2021, supply chain disruption and skyrocketing demand sent raw material prices through the roof. Coal, copper, lithium, nickel, and cobalt especially saw extreme upticks in their trading price. Subsequently, mining stocks watched their earnings explode, thanks to the fixed-cost structure of this industry.
With absurd levels of cash accumulating on the balance sheet, management teams decided to redistribute the wealth to shareholders through special dividends. In the first quarter of 2021, total special dividends paid across the UK hit £6.2bn.
Today raw material prices, while still high, have begun to normalise. Subsequently, the number of special dividends issued so far this year has only amounted to £934m. This £5.2bn void is what’s mainly responsible for the sharp drop in payouts.
Long-term wealth generation
Looking at the headline figures, it’s easy to see why many income investors are sceptical. But as we’ve just seen, this scepticism originates from misleading data. In fact, ignoring the influence of special one-time payments, analyst forecasts predict UK dividend shares to increase payouts by 11.1% in 2022, reaching a total of £85.8bn, versus £77.2bn a year ago.
As more companies recover from the pandemic and adapt to our current economic environment, the passive income opportunities will only get more bountiful. And with investor sentiment at a record low, due to inflation, many high-quality income stocks are currently trading at significant discounts.
The fears of a new recession aren’t entirely without merit. After all, drops in consumer spending don’t exactly create the ideal operating environment for most companies. But despite all the headwinds, there are plenty of firms with proven business models and solid cash flows. Both of these factors open the door to sustainable dividends. And when paired with a cheap stock price, it’s a recipe for substantial long-term wealth generation. At least, that’s what I think.