An improving economic picture, strong dividends from miners and a return to payouts from the banks will have been welcome news to income investors in the third quarter of 2021, according to the latest Link Dividend Monitor.
UK dividends rose to £34.9bn in the three months between July and September, up 89.2% year-on-year. Underlying payouts were 52.6% higher than a year ago at £27.7bn, while there was also an unexpected surge in special dividends at £7.2bn.
Double was paid out in specials during the third quarter than would typically be distributed over an entire year, the report said.
Link Group said that the “extremely strong” quarter meant the forecast for 2021 was upgraded, with headline dividends of £93.2bn now anticipated, up from £79.5bn in the second-quarter report.
Source: Link Dividend Monitor
As such, it has brought forward the timeline for dividends to return to their pre-pandemic highs by a year, suggesting they could be back by 2024, rather than the previously estimated 2025.
However, Ian Stokes, managing director of corporate markets UK and Europe at Link Group, warned that next year would be tougher for income investors banking on a UK dividend recovery.
“Commodity prices have come down sharply recently which makes it likely the big mining groups’ dividends will be lower next year. Special dividends will be much more normal in 2022 too,” he said.
This is compounded by the loss of two key dividend payers – mining group BHP, which is to de-list this year, and WM Morrisons, which is being taken private.
“With banks returning to strength and other sectors continuing to recover we still expect growth in 2022, but dividends will face headwinds rather than enjoy 2021’s strong, but blustery following breeze,” he added. According to link, dividends will be between £85bn and £89bn in 2022.
The latest third-quarter figure is yet to get back to 2019 levels – it is only slightly higher than in 2018 – but there were bright spots. Miners accounted for three quarters of the additional payouts as higher commodity prices led to record profits.
Companies from the sector paid out £12.8bn during the quarter, suggesting that by the end of the year £1 of every £4 of dividends will have been paid by the miners.
However the industry is cyclical and companies are no longer operating progressive dividend policies. The report noted that payouts will therefore “rise and fall with the commodity cycle”.
Stokes said that this raises an “amber warning” for 2022, highlighting that iron ore prices halved during the third quarter, while other metals were also lower.
Elsewhere, banking dividends made a large contribution as many that were still banned by the regulator from making payments last year have now returned.
The seven-year high for oil prices also boosted the oil giants. Royal Dutch Shell has already restored its dividend to half its former level, up from a third at the beginning on the year. The report suggested rising energy prices could add a further £800m in UK dividends as a result.
There was also a bounce in dividends from retailers. The main boost came from Kingfisher, although there are still a number of firms that have yet to return to paying an income.
At the other end of the spectrum, most companies in the travel and leisure sector continue to hold back their dividends, while BT – usually a large dividend payer – has yet to return, although has made plans to do so.