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Dividends on course for record in 2017
In the second quarter of 2017 UK dividends hit a new record at £33.3 billion, according to the latest UK Dividend Monitor from Capita Asset Services.
Dividends were up by 14.5% year-on-year, but income investors should not necessarily be rushing to celebrate. Dividends have been given a substantial boost from a weakened sterling. In addition, there's been a large haul of special dividends, and investors should bear in mind these payments usually only occur during the good times.
When stripping out special dividends overall dividends rose 12.6%, boosted by the weak pound. Weakness in the pound has been beneficial, as many firms declare their dividend payouts in dollars or euros and sterling's Brexit tumble increases their value in pound terms.
James Balfour, co-manager of the Aviva Investors UK Equity Income fund, points out the extent of currency effects on the level of dividends.
In 2016, over £28 billion of dividends were generated by six companies – HSBC (HSBA), British American Tobacco (BATS), GlaxoSmithKline (GSK), AstraZeneca (AZN), Royal Dutch Shell (RDSB) and BP (BP.). Balfour says all of these either have large US businesses or revenues stated in US dollars.
"Therefore, there has been some underlying growth due to organic progression, but those companies using payout ratios to drive their dividend per share had significant benefits as the earnings were impacted positively by the FX," he explains.
"This is emphasised by the fact that the yield on the FTSE 100 in 2016 was 3.99% and is expected to be 4.16% in 2017. However, ignoring 2016, it is still the lowest since 2013. It just happens that the market cap of the index is up 6% since end of 2013 in sterling, but is down 16% in dollar terms.
"We would argue that we are seeing progress across UK listed companies, but the driving factor this year is that the major components of the dividend contribution have also likely been those most positively affected by the depreciation of the pound, which has magnified the impact."
But even discounting the currency effect, underlying dividends still rose by 7.8%, which was the fastest growth in two years, according to the report.
The strong quarter has led the company to upgrade its 2017 forecast for headline dividends to £90.6 billion, which forms a 7% increase year-on-year.
Dividend growth was particularly strong in the mining sector, led by Glencore (GLEN) and Rio Tinto's (RIO) pay-outs. In consumer goods and housebuilding, every company also increased its pay-out. Financials, the largest sector, grew its dividends too, with a particularly large payout from Lloyds (LLOY) Bank.
Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services says: "Shareholders can be thankful they had punchy special dividends and the weak pound in their corner, but improving profits have also played their part.
"Exchange rate gains have come not only for big multinationals declaring dividends in foreign currencies, but also for others with overseas operations, or export sales, supercharging their profits and so their dividends."
He adds that even though the second half is going to be much quieter, investors can look forward to dividends hitting a new record this year.
"As we move towards 2018, the extent to which the weakening UK economy continues to diverge from improving trends elsewhere in the world will determine which companies are still able to deliver strong dividend 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.
|BRITISH AMERICAN TOBACCO||5,100.00p||1.15%|
|LLOYDS BANKING GROUP||72.12p||0.22%|
|ROYAL DUTCH SHELL||2,533.00p||0.48%|
|ROYAL DUTCH SHELL||2,584.50p||0.56%|
|All data 15min delayed as of: 03:47:08 24/01/18|
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