Dividends hit record in 2017, but beware the hangover this year

A total of £87.7 billion was returned to investors in the form of underlying UK dividend payments (stripping out special dividends), up 10.4 per cent compared to 2016. But investors should not expect history to repeat itself in 2018, warns a respected report from Link Asset Services (formerly Capita Asset Services), which drills down into the health of the UK dividend market. 

The report notes that certain events which last year helped boost UK dividends to beat their previous record, set in 2012, will no longer continue to provide a tailwind – most notably the resurgence of the mining sector. 

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Mining firms returned to the dividend register in 2017 following the recovery in the oil price, which has stabilised, with Brent Crude trading at $70 a barrel – more than double the price it stood at two years ago. 

Miners’ return to writing dividend cheques had a huge influence on the year-on-year comparison, accounting for half of the growth in UK dividends in 2017. When stripping out mining dividends, underlying dividend growth for the rest of UK market was a more modest 3.5 per cent. 

Favourable exchange rate gains also had a hand in boosting dividend growth for UK companies, on the back of weak sterling in the first couple of months of 2017. This accounted for around a quarter of dividend growth. 

While currency markets are notoriously difficult to predict, sterling for the most part of 2017 staged a recovery against both the US dollar and the euro, a trend that has so far continued this year. It therefore looks as though the currency boost UK investors have enjoyed has now run its course. 

On a sector level, not all investors had cause to celebrate. Overall, 13 sectors raised their dividends year-on-year in 2017, compared to five that saw payouts fall. 

The big winners were those with exposure to consumer goods firms or housebuilders, which collectively increased dividends by 18 per cent. Housebuilders have not historically been generous income payers, but since the last downturn a decade ago management teams have become more conservative. 

During the financial crisis housebuilders paid the price for taking on too much debt, a mistake they don’t want to make again, which is why they are prepared to pay dividends rather than go all out for growth.   

Topping the list of sectors that proved to be less income-friendly in 2017 was industrial chemicals (-52 per cent), followed by beverage and food producers (-32 per cent), information technology (-28 per cent), media (-24 per cent), and healthcare and pharmaceuticals (-11 per cent).

Justin Cooper, chief executive of Link Market Services, part of Link Asset Services, notes that when looking beneath the surface ‘2018 may feel like a hangover after 2017’s excesses’. 

He adds: ‘Exchange gains are currently set to reverse, special dividends are likely to fall, and there is nothing on the horizon to match the scale of the mining bounce-back. But there is no reason to be pessimistic. Slow and steady growth should continue to underpin UK dividends, but 2018 will feel sluggish compared to last year, even if it can still eke out a new record of its own.’

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