Tullow Oil chief executive Aidan Heavey: his company had a yield of just 0.5% in 2009

Investors will continue to struggle to find any decent yields from the stockmarket as many Irish and UK-listed companies fail to maintain dividend payments to shareholders. This is bad news for corporate investors and pension funds which need income to pay pensions, as well as private investors who rely on dividends for income.

According to a report published last week by Capita Registrars, last year dividends paid by companies listed on the UK stockmarket fell by £10bn to £56.9bn, a drop of 15%. This came despite a sharp increase in equity prices during the year. Although the Capita report says it expects the dividend payout to increase this year, the overall payout will remain well below the £66bn paid in 2008.

The overall yield of the UK market is expected to drop to 3.4% this year, from a high of 4.2% in 2008. This is due to a combination of improved share price performance and lower dividends. In Ireland, Davy is forecasting a yield for the entire market of just 1.7% this year, increasing to a meagre 1.9% in 2011.

However, according to Paul McNulty, manager of the global dividend fund at Setanta Asset Management, pension funds should be focusing on the total return of an equity and not just the current dividend yield. "Funds make long-term investments and a company will pay a dividend when it has a strong balance sheet and good free cash flow," McNulty said. "It is better to recapitalise a weak balance sheet rather than pay out dividends." But he admitted that there were fewer opportunities for yield in the Irish market.

Two of the top sectors for distributing dividends in the last number of years have been the banks and oil companies. Financials, which have been hit hard by the financial crisis, have cut dividends by £8.2bn, £6.1bn of which was due to banking dividend cuts. Although some banks' dividends are expected to improve this year, the sector is not going to be a major contributor to the overall dividend payout for a number of years. In 2010 Capita expects the banks to account for just 11% of all dividends from UK-listed companies, compared to 21% in 2007. Both Bank of Ireland and AIB have cut their dividend payments and have said that until the economic environment improves they have no plans to reinstate dividend payments.

According to McNulty, this is not just an Irish and UK problem. "Banks globally are offering less dividend opportunities. A few years ago banks constituted about 34% of dividend paying stocks in the world. Now they account for just around 20% of the high yield index," he said.

Robbie Kelleher, head of investments at Davy Private Clients, pointed out that although the banks aren't paying out dividends and are unlikely to do so in the near future there is access to yield from banks' second-tier bonds. Recently Bank of Ireland issued a bond with a coupon of 10%. Bank bonds are risky as restructurings are still possible as banks are forced to replenish their balance sheets. However, there is an argument that the government would not allow an Irish bank to default on a bond.

Oil stocks, which have until now been a high-yield sector, have also started to cut their dividend payouts. In the last month, BP and Shell, which account for about a quarter of dividends paid by UK companies, said that dividend payments would be frozen in dollar terms. This means that dividends would fall outside the US due to the weaker dollar. Oil companies have to be much more cautious because of the lower oil price. However, the report said oil and gas producers, mainly BP and Royal Dutch Shell, would remain the dominant dividend payers, paying out an estimated £15bn in 2010. Tullow Oil, which recently raised almost £1bn earlier this year, had a yield of just 0.5% in 2009 and this is expected to increase slightly to 0.6% this year.

Overall, last year 202 companies listed in the UK cut their dividend, 74 companies paid no dividend at all, 60 maintained their dividend and 179 increased their payments.

This cut in dividends looks even worse when combined with the amount of capital raised over the last few years. In 2009, UK companies raised £73bn in new equity, £16bn more than was paid out in dividends. The banks raised £41bn in new capital, bringing the total for the last three years to £83bn.