UK dividend growth warning

There's been plenty of disappointment for income investors over the past few months, with shareholders in banks, miners and supermarkets receiving lower dividends than before. Now we hear that UK dividend performance was the worst of all the G7 nations during the second quarter, and full-year forecasts have been reined in.

According to the Henderson Global Dividend Index (HGDI), UK dividends fell 3.3% year-on-year during the three months to 30 June. In the rest of Europe, payouts rose by 4.1% and in the US by 4.6%. Strip out Japan and investors in Asia enjoyed growth of 3.7%. Globally, it was 1.2%.

Standard Chartered was partly to blame. The emerging markets-focused bank said last year it was scrapping the dividend and raising £3.3 billion via a rights issue. Mining heavyweight Anglo American also ditched its payout following a collapse in commodity prices, Barclays halved returns and Wm Morrison is paying much less than before.

"Profit growth remains under pressure in the UK, limiting the potential for companies to increase dividends," says Alex Crooke, head of global equity income at Henderson Global Investors.

There was no impact from the Brexit vote in the quarter, either, he says, although this can be expected later in the year.

However, include special dividends and the second-quarter performance does look much better, with dividends in the UK growing 7.7% to $33.7 billion. Global dividends on this basis rose 2.3% to $421.6 billion (£322 billion).

GlaxoSmithKline was clearly a major factor in the UK's outperformance. In April, the drug giant paid an extra £1 billion, or 20p per share, to shareholders as part of a huge asset swap with Novartis. Intercontinental Hotels returned $1.5 billion a month later and also increased the interim dividend by 9%.

And London-listed companies are still among the world's biggest dividend payers. HSBC keeps third place behind Nestle and Sanofi, and Royal Dutch Shell has moved up from 14th a year ago to eighth place. British American Tobacco drops to 13th, while GlaxoSmithKline jumps to 18th, ahead of AT&T and Deutsche Telekom.

Still, Henderson believes the second half of the year is likely to be weaker than the first, in part due to seasonal patterns. Now, the emphasis shifts towards parts of the world where dividends are growing more slowly, like emerging markets, Australia, and the UK.

This triggers a reduction in Henderson's forecasts for dividends in 2016 to $1.16 trillion, down from $1.18 trillion. That's equivalent to headline growth of 1.1%, or 1.4% on an underlying basis.

Clearly, a weak pound means UK dividends will be worth sharply less to overseas investors in future. But, for UK-based investors, a plunge in the value of sterling means dividend income from abroad is suddenly worth a lot more.

"The shifting fortunes of different parts of the world highlight the value of taking a global approach to income investing," says Crooke. "As the US engine of global dividends is slowing down, so Europe is showing encouraging growth."

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.