Dividends from UK-listed companies hit a record £37.8 billion for the second quarter (Q2) of this year. While this should cause a cheer for income seeking investors holding UK equities, a more focused look at the underlying fundamentals reveal something rather worrying.
The information comes from Link Asset Services and while the total paid out by companies seems impressive, a lot of this was due to special dividends. Some of those paying special dividends were the usual suspects such as mining behemoth Rio Tinto although perpetually troubled bank RBS also paid out a large special. This is especially interesting as the banking group only posted its first profit for over a decade in 2017.
Another boost for UK dividends comes from the fact that many FTSE 100 stalwarts are overseas earners. This means that numbers have been boosted by a weakening pound when the companies translate their earnings from dollars for instance. Sterling has fallen against both the dollar and the euro during Q2, accounting for as much as half of the underlying growth rate.
Share price gains have resulted in weaker dividend yields but as Link said, yields are “still extremely high by historical standards”. The firm predicts that over the next 12 months, equities will yield 4.2% (excluding special dividends), with the FTSE 100 producing 4.4 percent and the mid 250 2.9 percent. This is down slightly on January’s average of 4.8 percent.
For those looking to get exposure to UK dividend payments, funds that include the large FTSE 100 players are as usual a must. However, latest evidence shows that the banking sector seems to have recovered, as along with RBS, Barclays paid out its biggest post-crisis dividend and emerging markets focused Standard Chartered also paid a hefty dividend making this sector one of the best performers.
Michael Kempe, Chief Operating Officer of Link Market Services summed up the results: “Investors are being dazzled by eye-catching specials and exchange-rate trimmings, but the UK’s dividend clothes are starting to look a bit threadbare underneath.
“As the world economy slows, and a looming Brexit exacerbates the underperformance of the UK economy, corporate profits are under pressure and that is limiting the scope for dividend growth. Q2 marks both the second upgrade this year to our headline forecast and the second downgrade to our underlying one. The true picture for dividends this year is therefore notably weaker than a first glance might suggest.”
