Income investors wondering how fast their dividends might recover from the pandemic may not have to wait much longer for good news.

The rate of decline in UK payouts fell in the three months to March to its lowest quarterly rate since Covid-19 first struck, according to Link Group, an investor services company.

The headline figure — a 26.7 per cent drop — hardly looks reassuring. But the rate of decline has been shrinking quarter by quarter since the 48.2 per cent plunge in the dire days of April to June last year.

Link forecasts increases from now on, predicting a 5.6 per cent rise in underlying dividends, excluding special payouts, over 2021.

Over the 12 months to March, covering the period since the pandemic hit the UK, dividends dropped 41.6 per cent, as two-thirds of companies cancelled or reduced payouts. Investors altogether lost £44.8bn, Link said, with 30 per cent coming from oil groups.

But even in tough conditions, there were some dividend winners. Food retailers raised payouts 22 per cent, led by Tesco. Consumer basics, headed by Unilever and Reckitt Benckiser, also posted dividend increases over April 2020 to March 2021.

“The outlook is brightening,” Link said. “Banking dividends are returning, though at low levels and there are positive signs from miners, insurance and media companies.”

David Smith, fund manager of Henderson High Income Trust, agreed. “While the last year has been painful for income investors, we can now look forward to aggregate dividends growing from their lowered base,” he said.

For income-first investors, the last year is a reminder of the value of investment trusts, which can hold back up to 15 per cent of any year’s income to smooth out good and bad times. Some 85 per cent of investment trusts either increased or held payouts during the pandemic.

As Kyle Caldwell, collectives editor at investment platform Interactive Investor, pointed out, the contrast with open-ended funds is stark, as they mostly cut payouts in 2020. “Signs the Covid-19 dividend drought has potentially come to an end will be particularly welcomed by fund managers that run an open-ended fund with an income mandate,” he wrote in a note.

Top 100 vs Mid 250

A rising dividend, driven by an economic revival from recession, could give an extra boost to the UK stock market, where bulls have been awaiting a recovery since the shock of the 2016 Brexit referendum.

Hopes that the reality of Brexit, implemented on January 1, would prove less damaging than feared have indeed helped lift UK stocks this year. But the early rollout of vaccinations has probably done much more to inspire confidence.

Even so, the UK’s market performance so far in 2021 has been moderate, with a rise of around 6 per cent in the FTSE 100 index. That is well behind the S&P 500 in the US, up over 13 per cent, and even European stocks, up over 12 per cent, as measured by the Euro Stoxx 50 index.

For bears, this caution over the UK is justified given a dearth of the kind of tech stocks that power the US market. But bulls still see opportunities. Citigroup private bank said in a report this week: “UK equities are cheap in absolute and relative terms and offer attractive dividend yields.”

In other words, even if the tech-led growth is not there, investors can go for value and income.