Equity income investors know that 2020 was a rough year for payouts around the world and that outlook brightened significantly this year.
One of the epicenters of dividend carnage during the worst days of the coronavirus pandemic last year was the U.K. – once a beacon of ex-US dividend growth. Payouts there were punished in 2020, but are rebounding and that resurgence could lead to opportunities with global dividend exchange traded funds such as the SmartETFs Dividend Builder ETF (DIVS).
“UK equity dividend yields also took a substantial hit in 2020. As the aftershock of the pandemic roiled markets, the Prudential Regulation Authority urged companies to hold onto their cash,” according to FTSE Russell research. “As such, many large UK companies slashed their dividends—particularly those in the Financial and Energy sectors. The FTSE 100 has historically been heavily weighted in these sectors, and as a result, saw dividend payouts drop by nearly 50% from 2019 to 2020.”
This year, UK dividends are on the mend and while growth is back, FTSE 100 dividend growth has some room to run compared to the S&P 500. Renewed growth in U.K. payouts is important to the DIVS thesis because the fund allocates 15% of its weight to that country – its second-largest geographic exposure after the U.S. at 52%.
Firmer Financial Footing
The silver lining in some of last year’s negative dividend action in the U.K. is that some sectors there are on firmer financial footing, meaning they can meet current dividend obligations and perhaps grow those payouts in the future. Moreover, the U.K. looks appealing compared to other regions.
“UK equity dividend yields have also reached attractive levels relative to other regions. They’re currently hovering around 3%—higher than the rest of Europe and the broader developed and emerging markets,” adds FTSE Russell.
That 3% dividend yield offered by the U.K. exceeds what investors find on developed and emerging markets indexes as well as broader European equity benchmarks.
With global dividends forecast to continue rising in 2022, the U.K. could take on a renewed leadership on that front, potentially lifting DIVS along the way.
“These encouraging trends have some investors believing that a strong UK equity dividend forecast could drive a more robust recovery for the FTSE 100,” according to FTSE.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.