As dividend forecast falls, how can you ensure your portfolio gives you a healthy income?

In this low interest rate but high inflation environment, a healthy regular income is the holy grail for many of us. That income cannot be achieved via cash savings at present, since no account can match an inflation rate of over five per cent, which means that many of us turn to investment dividends to give us the regular payouts we need.

Dividend seekers have had a good few months, but recent figures suggest a slow down is on the horizon. Link Group, which monitors dividend payouts from the UK stock market, is forecasting that dividends paid out by companies will fall by seven per cent in the coming year.

That figure includes ‘special dividends’, which are paid one time only, usually when a company is particularly flush with cash and wants to distribute it to shareholders. 2021 was a good year for special dividends after 2020 lockdowns meant many companies cut their payouts, but these are far less likely in the coming year.

An unbalanced rebound

Despite huge rises in the last year, when dividends rose 46.1 per cent compared with the year before, the Link Report shows that payouts are now only at the same level as we enjoyed in 2017.

The rebound was unbalanced, too with certain sectors, such as mining, paying the lion’s share of the dividends. Mining companies made up a almost quarter of all the dividends paid out last year, with banking companies also driving dividend growth.

Elsewhere, in the travel and leisure sectors, payouts are yet to recover, while food and pharmaceutical companies have barely raised their dividends despite many companies spending extra on healthcare because of the pandemic.

What might happen next

Link Group believes that bank and oil dividends will sustain their dividend growth in the coming months, while mining investors are unlikely to see much dividend growth from this already high level.

The company highlights uncertainty in its dividend forecast caused by Omicron, tax hikes and inflation worries, any of which might knock dividends off course.

Overall, Link is forecasting that UK equities will have a yield of 3.5 per cent in 2022, compared with four per cent before the pandemic hit.

What should you do about dividends?

When it comes to investing, dividends are not the only game in town, as we all rely on capital growth from our shares as well in order to reach our financial goals. However, it is worth considering whether the shares you choose will be able to pay dividends going forward if you are hoping for a regular income.

Choosing shares in sectors, like banking, where dividends are strong is one way of ensuring you build up an income-producing portfolio. You can also look at the yield on individual shares, which is a measure of how much they pay out compared with their share price, to see if they are a good bet for producing income.

However, shares with a high yield come with a caveat. Sometimes cash payouts are unsustainable over a long time, and there is no guarantee that a dividend will not be cut. Checking the ‘dividend cover’, which is the amount of money a company is paying out as a dividend compared with its earnings, will help you to understand if a dividend is sustainable.

Another option for income seekers is to invest in specific funds that pay dividends. Funds in the ‘equity income’ sector are focussed on income-paying shares, while many listed investment trusts are particularly strong on dividend payouts. Some companies, such as the City of London Investment Trust, have increased their dividends for over 50 years in a row, and there is a list of ‘dividend heroes’ on the Association of Investment Companies (AIC) website.

Finally, if you’re looking for income but confused by the options, a financial adviser can help you to put together a well-diversified and sustainable portfolio of income-bearing shares and funds, ensuring that you make the most of the dividend opportunities available in 2022.