After being forced to reduce payouts in the Covid crisis of 2020, UK-listed companies saw their dividends rise strongly. 2021 ended significantly better for income-chasing investors than the previous year.
Dividends from UK-listed firms jumped by 46 per cent to £94.1billion, according to the latest UK Dividend Monitor from Link Group.
While that’s a dramatic increase, a significant boost came from special one-off dividends, which hit a record £16.9billion – three times their normal level.
Dividends for 2021: This year was better than 2020.
Once that is taken out of the picture, underlying payouts rose more modestly, up 21.9 per cent to £77.2billion, which is close to 2015 levels.
While the total payouts of dividends in 2021 have exceeded expectations, they are below their pre-pandemic average levels.
Mining accounted for almost a quarter of the UK total last year and was by far the biggest contributor to the increase, while airlines and the leisure & travel sector sector saw the biggest declines.
Booming commodity prices lifted profits at mining companies, which in turn handed out cash to investors, with payouts – at nearly £21billion – three times larger than the long term average.
A record-breaking recovery in 2021 was driven by 3x higher mining dividends than the long term average and a strong rebound in bank payouts.
Of that, some £6billion were in special dividends, as many groups preferred one-off payouts rather than drive expectations for future regular dividends too high.
Rio Tinto, the mining giant, was last year’s biggest dividend payer. Anglo-Australian BHP Group also contributed to 3 quarters of special dividends.
The second-highest driver of total dividend growth was the banks. They saw the largest jump in dividends after the 2020 ban on their payouts was lifted.
The special, frothy one-off dividends boosted total dividends in 2021
The report showed that dividend payments saw a quick bounce across most sectors, but the divers industrials sector experienced a nearly 60 percent increase.
It was a result of companies restarting paused distributions such as Rentokil or packaging group DS Smith and other groups like Bunzl growing their payouts.
Some companies remain on hold, however, so dividends in this sector remained a quarter below their pre-Covid level at £1.4billion, Link said.
The pandemic was so severe that airlines and the travel and leisure sector were both hit hard, they cut payouts of dividends almost 80 percent for the second straight year.
The 2021 oil sector dividends were lower because of the fact that the payouts in the first quarter 2020 were still strong and the cuts took effect only later.
Despite increasing oil prices allowing Shell and BP to once again increase their payouts in the middle of 2021 they still remain below pre-pandemic levels.
Telecoms were the second major casualty due to the cancellation by BT of its payouts. Typically defensive sectors – like food, basic consumer products and pharma – held their payouts flat.
The dividends of mid-cap firms rebounded twice so strongly as those from the top 100 companies. They grew by 44% and 20%, respectively.
However, the underlying dividends of mid-caps have managed to rebound to mid-2014 levels. The top 100, however, had returned to higher levels in 2016.
The top 100 companies saw their dividends rebound twice as fast last year than those of mid-cap firms.
How will dividends change in 2022?
Companies will have to deal with inflation, increased taxes and continuing disruption from the pandemic.
Link said that it would be crucial to identify which companies are affected or beneficiaries by inflation.
Price pressures are increasing everywhere. Some companies may be able pass on rising costs to their customers in full. Others will have to reduce their margins.
“A long period of absenteeism due to illness will reduce capacity and result in lower revenues. Inflation can also be impacted by supply shortages that cause more upward pressure. The report added that tax increases of large magnitude will affect the economy’s ability to spend.
Despite these headwinds, Link said they were ‘cautiously optimistic’, expecting underlying dividends to grow 5 per cent in 2022, rising to a total of £81billion.
The report says that payouts could increase by an additional 8.9% if you adjust for Morrisons’ delisting and BHP’s removal.
However, one-off and special dividends will continue to fall after reaching their historic peak.
This year’s biggest driver of dividend growth is expected to be banks and oil firms, while miners are likely to see a decline in payouts due to a strong 2021.
‘High [commodity]Prices mean that mining dividends are possible to continue. But such rapid growth is impossible, so it’s unlikely we will see these special dividends again, according to the report.
Ian Stokes, the managing director of Link’s corporate markets in UK, Europe and the United Kingdom, thinks that BHP’s imminent withdrawal from the FTSE 100 can help to restore balance to the UK Index.
He stated that “The dominance by big mining corporations has overshadowed and made it too difficult for the UK to generate income from the market” and UK payouts were now dependent upon a single highlycyclical sector.