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Income investors face a bleak outlook in 2021, as dividends are expected to recover by just 8 per cent from their lows of last year.

UK dividends were hit hard during the pandemic, falling by 44 per cent as companies rushed to conserve cash as a bulwark against volatility and business disruption. Company payouts are not expected to return to the record highs of 2019 until at least 2025, according to research by Link Group, an investor services business.

Though companies reassured investors that early dividend cuts would help ensure a speedy restoration of payouts, analysts say this is unlikely.

“This was a dreadful result for UK investors, especially those for whom dividends are a major source of income,” said Susan Ring, chief executive of corporate markets for Link. “There are reasons for optimism, but the resurgent pandemic has pushed back the reopening of the economy even further, especially in the UK.”

In 2020, UK dividends dropped to £61.9bn, their lowest level since 2011. Investors experienced an outsized drop in UK dividends because of the market’s heavy concentration on a few large payers across the mining, financial and energy sectors.

Despite a modest dividend recovery in the final quarter of the year, a resurgent virus and new restrictions damped the outlook for investors, including pensioners reliant on income from their investments.

Energy and oil company dividends are expected to be the slowest to return after cuts of over £11bn. Experts said these payouts could take years to recover as many companies used the pandemic as an opportunity to permanently reset their high dividends to more sustainable levels.

David Smith, manager at Henderson High Income Trust, said the dividends were likely to be less vulnerable in future, albeit from a lower base.

“By the latter part of the year we began to see a glimpse of better times ahead . . . I think this is likely to continue in 2021 but at low levels as companies remain cautious,” he said.

The biggest hit to dividends came from the financial sector, which accounted for 40 per cent of total dividend cuts after the regulator discouraged payouts in the pandemic.

“There was a lot of political pressure to cut dividends,” said Bruce Stout, manager of Murray International Trust at Aberdeen Standard Investments. “In the UK in particular, you have the worst environment for income-oriented funds since the last dividend recession 20 years ago.”

Investment managers caution against the “outdated” notion that the UK is the global hub for dividend seekers. Income funds without global mandates will struggle, advisers said, as a recovery in Asian markets as well as a focus on total returns has insulated many global income funds this past year.

“If you’ve got the flexibility to diversify your assets around the world, you’re fine, but if you’re hemmed in to one asset class or region or market, it’s going to be very difficult,” said Mr Stout.

Concentration risk for investors is particularly high in the UK, where just 10 firms are expected to pay out 75 per cent of the FTSE 100’s 2021 dividend, according to investment broker AJ Bell.

Russ Mould, investment director at AJ Bell, said that despite dividends improving from their levels in 2020, “concentration risk is something that all income-hunters must address when they assess the UK equity market”.

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