Pensioners hit income slump over dividends

PENSIONERS who rely on dividends to fund their income are being urged to rethink their strategy as FTSE 100 firms cut or cancel shareholder payouts.

Many top firms have slashed dividends as profits fall during the pandemic, but experts say this only accelerates a long-term decline in shareholder rewards.

High-dividend UK shares paid income of between 4 and 6 per cent between 1986 and 2010, with 5 per cent annual capital growth on top, but have struggled to repeat the success lately.

According to a report from investment consultants LCP, income stocks lost up to 30 per cent of their capital value in the past five years, even before the March crash.

Partner Dan Mikulskis said dividend payments are now concentrated in a smaller number of sectors, notably tobacco, oil and pharmaceuticals. “For many years, investors have done well by investing in large FTSE 100 dividend stocks, but the world is changing,” he said.

The shrinking number of dividend payers will come under greater pressure as 13 million income seekers move into retirement over the next decade or so. “Investing in a smaller number of companies and sectors in search of dividends is likely to be increasingly challenging.”

Mikulskis said investors and advisers should explore other income options including global infrastructure projects, high yield bonds, emerging market debt, and private credit.

Data from investment platform AJ Bell shows this year’s UK dividend cuts and deferrals total more than £31 billion. Investors have seen dividend income cut by 27 per cent on average, one in five has seen a cut of 50 per cent or more. This leaves 10 stocks paying 55 per cent of all dividends, led by BP, British American Tobacco, Rio Tinto and Astrazeneca, followed byvodafone and Unilever.

AJ Bell investment director Russ Mould said a third of FTSE 100 companies are standing by their payouts and the index is forecast to yield 3.5 per cent this year. “That looks relatively attractive amid record low interest rates and government bond yields, but is not guaranteed and requires a fairly rapid recovery in profits and tax flows.”

Mould advised researching stock picks carefully to limit risk and to consider European and Asian shares.

CJ Cowan, assistant portfolio manager at Quilter Investors, said it was a major blow that Lloyds, Barclays, HSBC, Standard Chartered and Santander pulled dividends but added: “Payouts should resume once the pandemic passes.”