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Dividends fell 44% in 2020! Here’s how I’d get rich with UK dividend shares in 2021

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2020 represented a bloodbath for a huge number of dividend investors. It’s true that the key to successful UK share investing is to take a long-term view. But at the same time it’s not exactly fun to watch companies you’re expecting to deliver big dividends in the near term fail to pay out.

The scale of last year’s carnage is illustrated in a report from Link Group. This shows total dividends dropped 44% on a headline basis, to £61.9bn. This was the lowest total since 2011 as companies cancelled or cut dividends in response to Covid-19.

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Meanwhile, underlying shareholder payouts from UK shares — those which exclude special dividends — slumped 38% to £61.1bn.

Get ready for more dividend cuts

Around two-thirds of UK companies slashed or knocked dividends on the head between quarters two and four, Link Group says. By comparison, just a quarter of UK shares raised their dividends during 2020.

Now, the financial data giant suggests that “the worst is over” for UK stock investors. But it adds that “the broader outlook has darkened in the last three months culminating in the renewed lockdown.” So Link Group expects more dividend cuts during the first quarter of 2021, although these reductions will be less severe than those of the prior three quarters.

Dividends to fall again in 2021?

Fresh Covid-19 lockdowns have caused Link Group to water down its dividend expectations in 2021. Three months ago, the firm reckoned payouts from UK shares would rise 15% under its best-case scenario. This figure has now been pulled back to 8.1% on an underlying basis. This suggests total dividends of £66bn.

Additionally, Link Group’s new worst-case scenario suggests annual dividends could actually drop again in 2021. It reckons these could fall 0.6% on an underlying basis, to £60.7bn. Its most negative scenario three months ago suggested a year-on-year rise of 6%.

Hand holding pound notes

Getting rich with UK shares

It’s no surprise that brokers are taking a more pessimistic tone on dividends. The profits outlook for many UK shares remains as clear as mud for the short-to-medium term. And a great many balance sheets remain under severe pressure.

According to David Smith, portfolio manager of Henderson High Income Trust: “It’s likely that more companies will continue to return to the dividend register in 2021 but at low levels as companies remain cautious until there is a clearer path for cash flows to recover and balance sheets to be repaired.”

Smith says that while he’s expecting some dividend growth this year, he adds that “it is likely to be at least 2022 before we start seeing more significant dividend growth.” Meanwhile, Link Group says that UK dividends won’t regain their previous highs until 2025 “at the very earliest.”

It’s clear then, investors need to remain extremely careful if they’re buying for decent dividends in 2021. But I don’t think they need to panic. There are still plenty of top-quality stocks that should pay out big this year. And The Motley Fool’s epic catalogue of special reports can help you dig these out.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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