Equity income investors typically prefer to play the asset class close to home, relying on UK equity income funds to deliver their income requirement. But while the latest Capita Dividend Monitor for the first quarter of 2016 shows UK dividends increased 6.4 per cent to £14.2bn, it also warns that UK dividends are in decline this year.
Justin Cooper, chief executive of Shareholder Solutions, part of Capita Asset Services, suggests investors should not be too gloomy. However, slowing payouts from UK companies may prompt UK investors to turn their attention to other dividend-paying regions.
The UK is also perhaps more susceptible to concentration risk than other countries, as Alex Crooke, head of global equity income at Henderson Global Investors, points out. “Overall, we are positive on the prospects for dividend growth in the year ahead, though sectors sensitive to falling commodity prices are likely to cut payouts to shareholders,” he warns. “The UK market in particular is heavily skewed by a few large companies, many of which are in the oil and resources sectors, whose dividends are under pressure at the moment. It’s no wonder, then, that so many UK investors are looking abroad for their dividends.”
According to the Henderson Global Dividend Index for 2015, the US was the “engine of global income growth” as it pays the highest proportion of dividends. Last year, US companies increased payouts to shareholders across almost every sector by 14.1 per cent to $405.4bn (£280.5bn). The country also accounted for two-fifths of the world’s dividends.
| Should investors be concerned about slowing UK dividend growth? |
Jamie Forbes-Wilson, manager of the Axa Framlington Blue Chip Equity Income fund, believes UK equity income investors shouldn’t be too worried: “Towards the end of last year, we thought dividend growth would turn negative in 2016 but actually it’s improved slightly. It has been helped in part by the weakness in sterling and the strength of the dollar. “I think the growth we’ve seen from other companies has been slightly better than had previously been anticipated but, clearly, there’s a factor that payout ratios have increased quite substantially, which means the rate of growth is inevitably going to slow. However, in a world of very low interest rates, somewhere between 3.5 and 4 per cent dividend yield is quite attractive versus bank deposits and some of the sovereign bonds that are out there, which, in many cases, are negative yielders.” |
Patrick Moonen, multi-asset strategist at NN Investment Partners, agrees the US and UK have historically been stable dividend-payers, although he observes the composition of payments in the US is changing, with a shift towards equity buybacks and away from cash dividends.
He explains: “If you look at cash dividends in the US, you’ve got a cash yield of approximately 2.2 per cent which is, compared to other regions, relatively low; but, if you also take into account the yield coming from equity buybacks, then you have a yield of more than 4 per cent, which has been stable and attractive.”
Another developed market becoming a reliable dividend payer is Japan. The index reveals headline growth in Japan was 5.2 per cent in 2015, taking payouts to $51.9bn and making it the second fastest headline growth rate among large developed countries. However, the decline in the yen’s value did dampen headline growth and “masked an impressive underlying growth rate of 19.2 per cent”, the best of the major economies.
