FTSE 100 special dividend bonanza – will it continue?

In 2018, over 10% of firms on the FTSE 100 made special dividend payments, totalling around £6 billion.

The FTSE 100 currently has a generous yield of 4.7%, making it one of the highest yielding markets in the world. That’s good for news for income seeking investors, provided the dividends are paid and not cut.

Behind the generous yield on offer is the FTSE 100’s historically low valuations levels. With fears around Brexit, the FTSE 100 has been out of favour with many investors, causing share prices to go down and yields to go up.

However, points out Russ Mould, investment director at AJ Bell, another factor has also played a role in propping up UK dividend yields: the growth of special dividends.

Mould notes: “A growing band of companies is also paying out special dividends which further boost the attraction of UK equities to income-seekers.”

In 2018, over 10% of firms on the FTSE 100 made special dividend payments, totalling around £6 billion. This was the highest figure ever paid in special dividends.

 

In 2018 that £6 billion contributed 7% to total dividends paid by FTSE 100 companies, adding 0.3% to the UK’s dividend yield. This, says Mould, was “a welcome addition to portfolio returns for income-seekers and one that will have put more of a gloss on the FTSE 100’s disappointing capital return in 2018.”

Will the special dividend bonanza continue into 2019?

Special dividend payments are not as dependable as normal dividends. While all dividends are ultimately paid (and increased or cut) at the discretion of the company, special dividends are one off payments decided upon on a yearly basis.

The absence of special dividend should raise less investor eyebrows than a normal dividend cut. As Mould notes: “By their very nature, special dividends cannot be relied upon.”

Over the past few years certain companies such as Direct Line, Admiral, Barratt Developments and Taylor Wimpey have built up a reputation for consistently paying special dividends year after year. As a result, many investors now expect these companies to pay the special dividends.

However, that is no guarantee that special dividend payments will continue. Whatever reputation for special dividend payments a company has built up, if the company’s cashflow or profit come under pressure, special payments become less likely.

This, says Mould, is a potential risk for housebuilders – some of which have built up reputations as reliable special dividend payers.

Mould notes: “Sceptics will also question the durability of the special payments from housebuilders in the event that the rules for help-to-buy are refined, even if they do have net cash balance sheets, and argue that it is easier to decline to pay a special dividend than it is to cut a regular one.”

There’s also plenty of precedent for cuts or scaling back special dividend payments, despite some shares having built up a reputation for being payers. In 2018 Direct Line cut its special dividend from 15p to 8.3p per share. Similarly, Next paid 590p a share in special payments over and above its regular payments between 2014 and 2017. Yet in 2018 the clothing company paid no special dividend. Also, ITV, which paid special dividends in 2013 and 2016, paid no special dividend last year.

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