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A time to reap

06 February 2015

Although income growth from UK stocks has been restrained in recent years, investors can expect a more abundant dividend harvest in 2015.

British companies rewarded investors with a record £97.4 billion of dividend payments last year –although one company, Vodafone, made up almost a fifth of this following the sale of its US business. Despite the headline growth – a 21% rise in overall payments in 2014 – there has been concern that, if the one-off windfalls are stripped out, regular dividend payment growth has stalled in recent years. However, the good news for investors going into 2015 is that regular dividend income from Britain’s largest corporates looks set to rise again over the year and beyond.

Although income investors have seen the growth of dividends ebb since the global recession, forecasts for 2015 look more positive – and need to be measured against low returns on cash. Investors can expect a 5.7% growth in regular dividend payments to £83.6 billion over the coming year, according to latest figures from Capita Asset Services; a welcome improvement on the 1.4% growth in 2014 (the smallest increase since the start of the decade). Of course, 2014 was dominated by the £20 billion that Vodafone returned to its investors, including its world record £15.9 billion special dividend.

In fact, an overall equity yield of 3.9% last year outstripped other asset classes, with a similar performance expected over the next 12 months. Equity income strategies continue to look favourable in light of the performance by government bonds, with the yield from UK 10-year gilts down to 1.6% in January. A flight to safety by investors concerned about the world economy and markets, together with falling inflation in the UK, underpinned this slide in gilt yields. Government bonds, with yields that are less than current low levels of inflation, look like poor alternatives.

Glass half full

Prospects for UK dividends in 2015 look more like a ‘glass half full’ – and filling. Much of this change of perception and outlook is due to the strengthening of the US dollar, which reversed the negative effects of the strong pound in the first half of 2014. The US dollar exchange rate is important for UK dividends as around two-fifths of pay-outs are declared in the currency. The pound fell 4% against the dollar in the fourth quarter; and gained against the euro (although fewer companies declare payments in the single currency).

However, there were factors that held back dividend growth in 2014. There was sluggish profit growth among the larger UK PLCs, and warnings from a range of industries, particularly supermarkets. The strongest sector was consumer services, however, with retailers and travel companies offsetting lower supermarket dividends as improved consumer confidence and spending boosted earnings, while falling oil prices translated into more expendable income for households. Tesco has cancelled its final dividend, which will cost investors over £900 million in 2015.

Industrials performed well last year, including support services, transportation, construction and electronics. The utility sector also returned to growth after two years of decline. In the financial sector, dividends paid by banks rose slightly, but general insurers and estate agents helped lift earnings. Commodity stocks were hard hit by the strength of sterling and were the worst performers in 2014. Mining firms cut back their dividends by 8%, as they also grappled with the slowdown of Chinese demand. Energy producers reduced dividend payments by 1%, as the price of oil tumbled.

Perennial harvest

However, oil majors Shell and BP, along with banking giant HSBC – all of whom report in US dollars – were still the most generous payers in the fourth quarter due to the strength of the greenback. The currency effect added £310 million to the total in the final quarter from these three companies. The top 15 stocks made up 63% of UK dividends, with much of their growth – a headline 24% increase from 2013 – from Vodafone. The FTSE 250, with less exposure to the global economy, increased overall pay-outs by 8%. However, FTSE 100 payments make up the lion’s share of UK dividends, with small and mid-cap companies representing only a tenth of payments.

One of the advantages of income investing is that it keeps investors focused on the medium to longer term rather than the short term. At the start of the year, the UK stock market contended with tumbling oil prices, deflation in the eurozone, lingering concerns over a recession in Japan and growth in China, and geopolitical uncertainties in Ukraine and the Middle East. Daily share prices entered a period of volatility. But the UK and US economies have held up and corporate earnings offer promise – and income investors should continue to reap the rewards of dividend pay-outs.

Data and figures for the article are drawn from Capita Asset Services’ UK Dividend Monitor Issue 22 – January 2015.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

FTSE International Limited (“FTSE”) © FTSE 2015. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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