2020 has proved to be a catastrophe for many dividend investors. Annual payout growth from UK shares was anticipated to slow as the global economy, and thus corporate earnings expansion, cooled. The Covid-19 outbreak has also put paid to hopes of any dividend growth this year, and spectacularly so.
A report by Link Group, published today, illustrates the scale of the carnage. Total dividends from UK shares plummeted 57.2% year-on-year during the second quarter to £16.1bn, it says. If you exclude special dividends payouts dropped 50.2% to £16bn. These figures represent the biggest drop on record.
A dive into Link Group’s data makes for extremely grim reading. A whopping 176 UK shares cancelled dividends in quarter two, while 30 cut them. Meanwhile, 124 companies rescinded on dividends they’d already pledged.
The report suggests that investors in UK shares should be prepared for an eye-popping dividend drop in 2020 too. Under its best-case scenario, Link Group expects underlying payouts (i.e. stripping out special dividends) to slump 39% to £60.5bn. Its worst-case blueprint suggests underlying dividends will slip 43% to £56.3bn.
Dividends to recover in 2021
The impact Covid-19 has had on shareholder returns has clearly been shocking. Margot von Aesch, income research analyst at Redburn, comments that “destruction caused by the pandemic has been of historic proportions, leaving only a handful of companies untouched.”
The timing and scale of the recovery in shareholder returns is hard to call. And Redburn says that “the shape and size of the rebound in payouts will be dictated by the new economic context, both locally and internationally.”
But investors should expect a ripping rebound following 2020’s falls. Link Group’s report suggests that dividends from UK shares will bounce back in 2021. However, it adds that it will take “several years before dividends reach 2019 highs.”
Get rich with UK shares
So a fair few dividend investors have had a torrid time of late. But that doesn’t mean buying UK shares is a bad idea. Indeed, I remain convinced share investing remains the best way to try and get rich and retire early.
Let me explain why. Even under Link Group’s worst-case scenario, UK shares will yield 3.3% over the next 12 months, and 3.6% for 2021. Compare that with the paltry interest rates that cash savers can expect today. Even the best-paying Cash ISA right now yields less than 1%, for example.
By the way, under Link Group’s best-case scenario, UK shares will yield 3.6% during the next 12 months, and an even-better 4.1% for 2021. There’s clearly still plenty of reason for dividend investors to be optimistic.
The coronavirus crisis and the consequent economic storm means investors need to be more careful than even when building their shares portfolios. But there are still many terrific dividend stocks out there that should help you make excellent returns in the near term and beyond.
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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.