Learning lessons from the UK dividends bounce back

After a grim 2020, UK dividend payments rebounded by 46% in 2021, but despite the positive surge, there are some important lessons for investors.

New research shows that UK dividend payments rebounded strongly in 2021, but still remain below their pre-pandemic level. The experience of the last two years holds important lessons for investors.

2020 was a grim year for anyone who relied on UK company dividends as a source of income. The total dividend payments from UK plc fell by 43%, taking them just about back to a 2011 level. Unsurprisingly, the Covid-19 pandemic was to blame, with companies rushing to preserve cash and the Bank of England forcing banks to stop dividend payments.

The latest Dividend Monitor from Link Group, one of the UK’s leading share registrars, paints a much cheerier picture for 2021, with total dividend payments rising by 46%. Alas, the laws of mathematics do not mean that dividends are now back above their pre-Covid 2019 level – 2020’s 43% decline needed to be followed by a 75% rise to return to square one. Nevertheless, the 2021 dividend payout has returned to a level comparable to about five or six years ago. At the start of 2021, few were expecting such a rapid recovery in dividends; Link’s best-case scenario was for 10% growth, while its worst case was for a further, albeit small decline.

The surge in dividends was helped by a much larger than normal crop of special (one-off) dividend payments, often stemming from company spin offs or reorganisations. If these are removed from the calculation, underlying (regular) dividends posted a year-on-year increase of 22%.

The bounce back in UK dividends has important lessons for investors:

The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.