Weak pound to deliver Brexit dividend windfall

Income seekers who invest in UK companies will receive an unexpected windfall this year on the back of sterling's steep decline since last month's Brexit vote.

According to Capita Asset Services' latest UK dividend monitor study, the weaker pound will boost payouts by £4.3 billion this year. Overall, underlying dividends are expected to come in at £76.9 billion.

The sharp deprecation in sterling following the 'leave' vote is a silver lining for income investors, due to the fact that around 40% of UK companies pay dividends in either dollars or euros.

These companies tend to be the big income heavyweights such as Vodafone and BP, who both declare in dollars, in turn boosting overall dividends for UK companies.

Unexpected windfall

This is particularly the case, given that just 10 mega-cap stocks dominate UK dividend income payments and are expected to account for 55% of all dividends this year.

They are: Royal Dutch Shell, HSBC, BP, GlaxoSmithKline, Lloyds, British American Tobacco, Vodafone, AstraZeneca, BT and National Grid.

Typically the more domestically focused businesses, which usually reside in the ranks of the FTSE 250 index, pay their dividends in sterling.

Justin Cooper, head of shareholder solutions at Capita, says: "The pound's immediate 13% devaluation against the US dollar, pushing it to a 31-year low, will bring an unexpected windfall to UK-based investors.

"If the exchange rate maintains an average $1.33 in the second half of the year, the translated value of all those dividends declared in dollars will be boosted by £2.7 billion over the next six months, with another £120 million from those declared in euros.

"For as long as the pound stays low (and there is little to support it at present), those gains will persist in future years too, though of course, the global purchasing power of a pound will be much diminished."

The exchange rate gains will help offset the impact of dividend cuts that have come thick and fast over the past 18 months, a trend that has made it tougher for income investors to find attractive dividend-paying shares that will not turn off the dividend tap.

Indeed, average dividend cover, the ratio of a company's net income to the dividend paid to shareholders, has fallen dramatically over the past year.

This has led to concerns too many shares are "value traps" - those which offer a high prospective yield, but for which in reality dividends are becoming harder to afford, so therefore may be cut.

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.