Record UK dividend payments, but there is a sting in the tail 

Annual dividend payments for 2019 on track for new record high of £107.4 billion.

UK dividends reached a new all-time high in the second quarter, keeping payments on track to break the £100 billion barrier this year.

According to Link Group’s latest dividend monitor, UK dividends in the second quarter rose by 14.5% on a headline basis, coming in at £37.8 billion. This surpasses second quarter payouts in the second quarter of 2018 by £4.4 billion.

Less positively, however, much of that dividend growth is the result of exceptionally large special dividends and the current weakness of the pound.

After subtracting special dividends, growth came in much weaker at 5%, with total payouts standing at £32.4 billion.

Special dividends totalled £5.4 billion, 147% higher in the second quarter for this year compared to last. Two-fifths of special payments came from Rio Tinto, with major payouts also coming from Micro Focus International and Royal Bank of Scotland.

At the same time, exchange-rate gains were instrumental in driving underlying dividend growth, accounting for almost half the increase in payouts.

Link’s ‘underlying’ figure subtracts only special dividends, rather than also stripping out the impact of exchange rate effects. More than two-fifths of dividends were paid in euros or dollars, meaning that once they were exchanged into a weakened pound, they received a boost worth £820m, adding 2.5% to the growth rate.

Nonetheless, annual dividend payments in the UK should come in at a new record high, £107.4 billion. Even accounting for potential headwinds such as a slowing global economy and a disorderly Brexit, Link expects a yearly headline increase of 7.6% in 2019.

However, subtracting special dividends gives an underlying growth is forecast to come in at 2.9%, almost two-thirds of which is expected to be down to exchange rate effect.

Michael Kempe, chief operating officer of Link Market Services, says: “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.

 “As the world economy slows, and a looming Brexit exacerbates the underperformance of the UK economy, corporate profits are under pressure and that is limiting the scope for dividend growth.

“The true picture for dividends this year is therefore notably weaker than a first glance might suggest.”

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