Dividends on course to hit record high in 2017

In the second quarter of 2017 UK dividends hit a new record at £33.3 billion, according to the latest UK Dividend Monitor from Capita Asset Services.

Dividends were up by 14.5 per cent year-on-year, but income investors should not necessarily be rushing to celebrate. Dividends have been given a substantial boost from a weakened sterling. In addition, there’s been a large haul of special dividends, and investors should bear in mind these payments usually only occur during the good times.

When stripping out special dividends overall dividends rose 12.6 per cent, boosted by the weak pound. Weakness in the pound has been beneficial, as many firms declare their dividend payouts in dollars or euros and sterling’s Brexit tumble increases their value in pound terms.

But even discounting the currency effect, underlying dividends still rose by 7.8 per cent, which was the fastest growth in two years, according to the report.

The strong quarter has led the company to upgrade its 2017 forecast for headline dividends to £90.6 billion, which forms a 7 per cent increase year-on-year.

Dividend growth was particularly strong in the mining sector, led by Glencore and Rio Tinto’s pay-outs. In consumer goods and housebuilding, every company also increased its pay-out. Financials, the largest sector, grew its dividends too, with a particularly large payout from Lloyds Bank.

Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services says: ‘Shareholders can be thankful they had punchy special dividends and the weak pound in their corner, but improving profits have also played their part. Exchange rate gains have come not only for big multinationals declaring dividends in foreign currencies, but also for others with overseas operations, or export sales, supercharging their profits and so their dividends.

He adds that even though the second half is going to be much quieter, investors can look forward to dividends hitting a new record this year. ‘As we move towards 2018, the extent to which the weakening UK economy continues to diverge from improving trends elsewhere in the world will determine which companies are still able to deliver strong dividend growth.’

‘The rapid rate of dividend growth seen in the second quarter helps to underpin analysts’ forecasts of around a 15 per cent increase for 2017 overall and why many income-seeking investors are drawn to the UK stock market,’ says Russ Mould, investment director at AJ Bell.

He cautions that the FTSE 100, which provides the vast bulk of dividend payments for the UK market, has an average dividend cover score of 1.6 times, below the ‘safe’ level of 2 times.

If the UK and global economies maintain their current momentum then dividends will in theory continue to grow, but if there is an unexpected dip in earnings some firms may struggle to maintain their dividends, let alone grow them.

‘Special dividends from companies like National Grid and ITV have also boosted the total pay-out, while the big oil majors, BP and Shell, have done their bit by committing to leaving the dividend unchanged. Even though only Pearson is already talking openly about a dividend cut for 2017 investor must tread carefully,’ adds Mould.

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