Bad news for income seekers

A strong pound and lacklustre global economic recovery caused UK dividends to grow at their slowest pace in more than three years during the second quarter, according to Capita. And the share registrar warns that things might not pick up until next year.

UK companies paid back £25.8 billion to shareholders via dividends during the three months to June, just 1.2% more than the same period last year. That's a further blow to income seekers just a week after figures revealed an increase in consumer price inflation to 1.9% and the Retail Prices Index (RPI), which includes mortgage payments, rents, and council tax, at 2.6%.

And Britain's blue chip brigade gets much of the blame. "Given their size and contribution to the total amount paid out, income investors are a hostage to the fortunes of the very biggest listed companies," says Justin Cooper, chief executive of Shareholder solutions at Capita.

Indeed, payouts from the top 15 companies, which account for over three-fifths of the UK's dividends, fell by 0.8% year-on-year as the strength of sterling hit earnings hard. Players in the Gas, Water & Multiutilities sector - traditionally a rich source of income for investors - grew dividends by just 1% during the quarter to £717 million. Both the banks and life insurers paid out 3% less than 2013 - £3.5 billion and £2.3 billion respectively - while miners slashed payouts by a tenth to £3 billion.

Capita is so concerned it has cut forecasts for dividend income this year for a second time. Having already downgraded expectations by £1.7 billion in April, the company has made a further cut of £900 million to £98.5 billion. Strip out the effect of special dividends, and payouts are tipped to grow by 3.5% to £80.6 billion. That's the slowest growth since 2010 when BP temporarily left the dividend list following the Gulf of Mexico oil disaster.

However, it's not all bad news. "We should see a pick-up in 2015," says Mr Cooper. "It'[s hard to imagine the currency continuing to detract from growth, and if the pound maintains its current level it will only have a small impact in the first half of next year. Equally, if as forecast, the global economy picks up speed, it will be felt right at the top of the FTSE 100 (UKX), and this should filter its way into investors' pockets."

Many outside of the top 15 are already feeling the benefit of the UK economic recovery. Dividends here grew by an average of 4.4%, driven by 18% growth among consumer services firms like travel companies, retailers and housebuilders, while the ongoing property boom encouraged others, including many of the listed estate agents, to be more generous to shareholders.

And despite a drop in 12-month yields to 4.1%, equities still beat 10-year gilts, property rental and cash deposits at 2.75%, 3.6% and 1.3% respectively.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.