Investing for Income: UK shares forecast to pay lower dividends in 2022

According to Link Group’s Dividend Monitor UK dividends recovered in 2021, but the outlook is less rosy with payouts forecast to fall over the next 12 months – writes Christian Leeming.

 
UK dividends took a pounding in 2020 as companies paused or cancelled payouts during the Covid-19 pandemic; at £61.9bn, dividends fell 44% from pre-pandemic levels in 2019. However, in 2021, dividends rose by 46.1% to £94.1 bn, taking the total close to 2017 levels.

However, the recovery has been uneven; sectors hit hard by the pandemic have continued to cut dividend payouts – including airlines, leisure and travel.

Oil dividends were also lower as reductions in 2020 spilled over into 2021, with telecoms the other main casualty, after BT cut its dividend. To compound things, typically defensive sectors, such as food, basic consumer goods and pharma, kept payouts flat.

Investors in mining companies struck it lucky as Link Group reported the sector had a major influence on overall dividend growth, contributing £21bn compared with £8bn in 2020.

The report notes: ‘It was a very unbalanced year with excessive dependence on mining companies, whose booming profits meant payouts were three times larger than the long-term average. Together they accounted for almost a quarter of the UK total last year, and were by far the biggest contributor to the year’s increase in dividends overall.’

The contribution of banks was also significant after they were given the green light to restore payments after the regulator made them stop in 2020.

Industrials also chipped in, albeit with payouts a quarter below pre-Covid levels; special dividends hit a record high of £16.9bn – three times higher than normal level, with miners again to the fore.

Link forecasts UK dividends to fall 7% to £87.5bn in 2022, but with a more even recovery and most sectors delivering growth.

It cautions that mining companies ‘can neither sustain this pace of increase nor likely repeat special dividends of this size’. Link also expects special dividends to fall from their record peak.

Miners’ dividends fluctuate depending on the performance of the iron ore price, so the sector is not a reliable dividend payer. Companies have strict dividend payout ratios, so if earnings fall, dividends are likely to follow.

Link Group’s report adds: ‘Mining profits soared on the back of booming commodity prices and cost efficiencies secured after the last commodity crash. Miners declared special dividends rather than drive expectations for future regular dividends too high.’

Predicting UK equities to yield 3.5% in 2022, Ian Stokes, MD at Link Group, said: ‘The recovery in UK dividends is not complete, but the easiest part of the catch-up is now behind us. 2022 faces a number of headwinds in the form of Omicron disruption, inflation, and tax hikes and that adds uncertainty to our forecast.

‘As the pandemic continues, it would be easy to take a knife to our expectations for dividends for the coming year. We are, however, cautiously optimistic that most sectors can deliver growth.

‘Banks and oil companies should be the main engines of progress in 2022. Mining companies can neither sustain this pace of increases nor likely repeat special dividends of this size. We are hopeful that their regular dividends are supported, however, given relatively firm commodity prices.

‘The proposed imminent departure of BHP from London will help restore some balance to the UK index. The dominance of big mining groups has overshadowed the income-generating capacity of the broader market and left UK payouts too heavily dependent on a single, highly cyclical sector.’