The amounts paid in dividends to investors in UK companies hit a new record in the second quarter of 2019 - but there was a warning that the picture for dividends is beginning to look ‘threadbare’.
Numbers from Link Market Services showed that £37.8bn was handed out by companies in the three months to June, an increase of 14.5% and more than £4bn more than the previous quarterly record.
Yet despite the seemingly strong growth in dividends there was a note of caution. The cash sums paid out were flattered by currency movements, with the weaker pound making pay-outs look bigger, and a greater proportion of the total was made up of special dividends which may not be repeated in the future.
Michael Kempe from Link Market Services, said: “Investors are being dazzled by eye-catching specials and exchange-rate trimmings, but the UK’s dividend clothes are starting to look a bit threadbare underneath.”
Large special dividends from Royal Bank of Scotland, Rio Tinto and Micro Focus added to the tally in the period, helping to mask cuts as some notable dividend payers, including Marks & Spencer and Vodafone.
The mixed picture led Link to lower its forecast for underlying dividends in 2019 by £500m.
Dividends in the UK have been historically higher than many other major markets. The yield from the FTSE 100 right now is around 3.9% - that’s the income that could be expected if dividends paid in the past 12 months are repeated. This provides extra ballast to the total return that investors get. If share prices fall it will reduce losses, and if they rise dividends add to gains.
Do these figures show dividend income to be at risk? It’s important to note that while underlying dividends are not growing as the headline cash figure, they are still growing. Underlying dividends - with special dividends stripped out - were 5% higher in the period than a year ago. If you account for currency, that falls to 2.5%.
Investment Pulse email
Sign-up to receive daily investment news and insights
Thank you. We've emailed you to confirm your subscription.
Not rapid growth, then, but growth nonetheless and, remember, UK investors who spend in pounds and pence will not be as concerned about the currency effect as foreign investors.
The warnings about future pay-outs shouldn’t be dismissed completely, though. Dividends ultimately depend on the performance of companies and their ability to generate cash, and Link said that forecasts for growing profits for UK companies were dependent on the UK avoiding an economic hit from a disorderly Brexit.
For investors looking for stable dividend yield, investing beyond the UK can be a good idea. Yields for other markets may be lower but specialist equity income managers are used to looking for dividends which are reliable and can grow in the future.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.