UK dividend payments hit historic highs

  • August 28, 2019

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What does the chart show?
It shows that dividend payments from UK companies have climbed steadily in recent years, offering positive news for investors amid the gathering economic storm.

The average UK dividend yield — payouts as a proportion of the share price — rose to 4.8 per cent in 2018, marking a 29-year high, according to Link Asset Services. Although the average yield is expected to dip slightly this year, at 4.2 per cent it remains well above the 30-year average of 3.5 per cent. Excluding special dividends, Link expects FTSE 100 companies to yield 4.4 per cent over the next 12 months and FTSE 250 stocks to pay out 2.9 per cent. The last time UK dividend yields were so high was in the midst of the 2008 recession.

Why have dividend yields shot up?
Dividend growth has been strong in recent years, boosted by large special payouts from UK-listed companies in the commodities, housebuilding and banking sectors. Rio Tinto, the mining group, recently declared a surprise $1bn special dividend reflecting the generous payouts that many of its peers have made since recovering from the 2015 commodities slump. Housebuilders including Taylor Wimpey have a strong record of declaring special dividends, but banks have also enjoyed strong profit growth and are returning cash to shareholders, as shown by Royal Bank of Scotland’s £903m special dividend earlier this year.

UK dividend yields have also been boosted by specific market conditions. The fall in the value of the pound since the 2016 Brexit vote has boosted the overseas earnings of UK-listed companies. According to Link, exchange rate gains made up almost half of the 5 per cent increase in underlying dividend payments in the second quarter of 2019.

Will this trend continue?
Growth is slowing globally, undermining companies’ ability to sustain dividend growth. According to Janus Henderson, in the second quarter global dividend payments registered their lowest quarterly growth since the end of 2016, as trade tensions and the stuttering world economy began to take their toll.

Corporate earnings are particularly lacklustre in the UK due to ongoing Brexit uncertainty. Several high-profile dividend cuts this year from Centrica, Vodafone and Marks and Spencer could be a sign of things to come. M&S had not cut its dividend for a decade, whereas Vodafone had held off for almost 20 years.

Data provider IHS Markit forecasts a 3 per cent rise in FTSE 100 dividends this year, excluding one-off payouts — considerably less than the 15 per cent increase investors enjoyed in 2018. In 2020, it forecasts ordinary payouts will increase by 10 per cent.

Additionally, Link notes that even in the 2008 to 2009 recession, UK dividends only dropped by 14 per cent on average from peak to trough. It adds that even if dividends do fall slightly, the yield will still be attractive for investors.

Dividends or share price growth — which is more important?
A company’s share price is naturally an important metric for investors. But investment experts say that in the event of a recession, dividends provide vital protection. While share price gains can be wiped out suddenly in a stock market crash, dividends can serve as a buffer to counteract these falls. Investors can also compound their returns by reinvesting dividends, using the payouts to buy more shares at a lower price.

Ben Willis, head of portfolio management at Chase de Vere, says: “Dividends are attractive within a recessionary environment because you can ‘bank’ the dividend from day one, which provides a good starting point for any equity investment.”

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