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Pay-out tailwind?

21 February 2017

UK dividends rose sharply in 2016, boosted significantly by the weaker pound and special payments.

While politics has thrown up plenty of surprises in recent months, the latest figures from the Dividend Monitor from Capita offer a reminder that leading stock markets have sailed on through relatively unscathed.

The report shows that UK dividends jumped by a stunning 11.7% in the fourth quarter, taking the rise for the year as a whole up to 6.6%. Headline dividends therefore increased in value by £5.2 billion in 2016, while the fourth-quarter total rose to £16.6 billion – a record, by quite some margin, for the last three months of the year1.

Even before including dividends, the FTSE 100 rose by 14.4%2 over the course of the year; and so sterling equity investors can look back on an exceptionally strong year, particularly when measured against the close-to-zero return on cash.

Digging deeper

The rise in dividends was not, however, simply a story of corporate profitability soaring ever upwards. For one thing, the greatest increase was in special dividends, which more than doubled year-on-year, boosted most of all by fourth-quarter pay-outs, which came to £6.1 billion. The 2016 special dividend tally for FTSE 100 companies was the second largest on record. Special dividend payments can reflect improved profitability, but they can also signal that cash-rich companies are not yet ready to commit themselves to higher ordinary dividend payments – indicating concerns over the outlook.

Among the biggest payers of special dividends last year was Shell, which accounted for £1 in every £8 of UK dividends. The next-biggest pay-outs came from HSBC, BP, GlaxoSmithKline and Vodafone. These five companies accounted for 38% of FTSE 100 dividend payments in 2016 – up from a third the year before3.

In part, the broader rise reflected the fortunes of particular sectors. Pay-outs were strongest among pharmaceuticals, banks, oil & gas majors, and consumer goods companies; and often for obvious reasons. The rising oil price offered support to oil & gas stocks, while expectations of interest rate increases buoyed bank stocks. Some sectors struggled, among them mining and basic materials. Thus basic materials saw dividend payments fall 54% in 2016 (annualised), while both consumer services and pharmaceuticals paid out 26% more compared to 20154.

Dividend trends should reflect corporate profitability but, in reality, company performance lagged somewhat over the course of the year. Thus the improved pay-outs over the course of the year largely reflected generous special dividends and a weaker pound, rather than any corporate idyll. Most of the larger companies in the FTSE 100 make the majority of their profits overseas, meaning that the fall in sterling flattered their profits once translated back into pounds and pence and, in turn, boosted dividend payments. Capita calculated that £4.8 billion of the £5.2 billion headline increase in dividends came as a result of the weaker pound5.

Capita argues it is unlikely that dividends can continue to increase at such a high rate. Instead, it forecasts 2017 growth of 3.8% for the FTSE 100 and 2.5% for the FTSE 250. However, it expects sterling to offer further support as multinational companies convert profits into sterling, taking the FTSE 100 figure up to 7.5%. Special dividends, on the other hand, are forecast to fall after an exceptional year6.

It is likely that 2016 will prove to have been a relative dividend windfall for sterling investors. If such giveaways are now set to become less common, as Capita predicts, then it will become all the more important to maintain a portfolio with the right blend of income-generating companies. Moreover, longer-term dividend sustainability will rely not on occasional bouts of generosity, but on improved corporate profitability, which is why early detection will remain as important as ever in finding the right stocks.

Yet the broader lesson of last year continues to hold water; namely that equities should remain the focus of any portfolio seeking strong and sustainable income returns. As Capita put it at the end of its report: “Equities therefore show no sign of losing their top spot as the best yielding option among… key asset classes.”


The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested. 

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