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Our views 15 October 2021

IA UK Equity Income Sector outperforming FTSE All Share

5 min read

After a miserable 2020 in which dividends declined by 44% to £61.9bn, the lowest annual total since 2011, pay-outs have bounced back strongly. Many companies have reinstated and increased their dividend distributions, or paid special dividends.

This recovery is reflected in the performance of the IA UK Equity Income sector, which has comfortably outperformed the FTSE All Share Index over the 12 months to end of September. Distributions by the RL UK Equity Income Fund in the fourth quarter of 2021 were 39.7% higher than in the same period for 2020, supported by strong cashflows in the mining sector, with Rio Tinto and Anglo American both making huge payments to shareholders amid bumper profits.

RL UK Equity Income Fund Distribution history

Image shows the Royal London UK Equity Income Fund Distribution history from 2005-2021.

Source: RLAM. Chart shows net income in pence per unit for A share class. Past performance is not a reliable indicator of future results.

Accounting years to 31 July (Unit Trust) to 31 August (following conversion to OEIC), net of 10% tax. Amount shown in year income paid out. Data as at 31 August 2021.

For 2021 as a whole, the market expects dividends per share in the FTSE All Share Index to be 35% higher than in 2020 but 15% lower than in 2019. They are then expected to be broadly flat, with a very gradual recovery through to 2023. This muted dividend growth reflects the fact that the average pay-out ratio is expected to be materially lower in 2023 than it was in 2019. That, in turn, reflects some continued uncertainties around the trajectory of the economic recovery. Additionally, the likes of Royal Dutch Shell and BP have fundamentally rebased their dividends, and GlaxoSmithKline will follow their lead when it demerges its Consumer Healthcare business in mid-2022. The bumper special dividends from the mining companies that we have seen this year are also not expected to persist over the coming years.


FTSE All Share

Dec '19


Dec '20


Dec '21E


Dec '22E


Dec '23E


Free Cash Flow per Share 230.9 167.86 230.64 267.51 287.7
EBITDA Margin (%) 16.62 17.49 20.24 20.1 20.08
Pay-out Ratio (%) 62.75 68.41 52.43 48.92 47.63
Dividend Yield (%) 5.01 3.12 3.83 3.83 3.91
Net Debt to EBITDA (x) 1.71 2.16 1.58 1.38 1.23

Source: Factset, September 2021. Forecasts are not guaranteed.

The good news is that these expected dividend policies should be much more sustainable in future. Not only are the pay-out ratios less demanding, but companies are benefitting from higher free cashflows and profitability, alongside stronger balance sheets as rewards for cost cutting and streamlining during the pandemic. The average EBITDA margin is expected to be some 3.5% higher in 2023 than it was in 2019, and consequently the net debt to EBITDA ratio is forecast to drop from 1.71 to 1.23 over that same period, providing good support for the forecast 3.9% index yield. It is also worth noting that the dividend cuts from a small number of major index constituents mask the fact that the underlying dividend growth for the broader market looks very healthy.

We believe that our style-agnostic approach of investing in a broad range of companies offering strong cash generation, diversified by sector and lifecycle stage, will result in a portfolio that not only features an above-market yield, but also single-digit dividend growth.


Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.