Our Views

UK dividends breaking new records

Recent equity market volatility has made many investors nervous, but it’s left one group feeling slightly better.

Income seeking investors are benefiting from higher yields and higher total payments on company shares thanks to falling capital valuations and rising profitability.

The latest UK Dividend Monitor from Link Asset Services has reported a record year for UK dividends in 2018, rising to a total paid of £99.8bn. This record year for UK dividends was the result of rising profits, slightly better-than-expected special dividends, and a fall in the value of Pound Sterling in the second half of the year.

These three factors combined pushed total UK dividends higher to reach close to £100bn for the first time, a new record amount. It means total dividends paid to UK investors rose by 5.1% in headline terms when compared with the previous year.

When excluding special dividends, the underlying total rose by 8.7% compared with 2017. Looking specifically at the fourth quarter of the year, which represents a seasonal low for dividend payments, a new record was also reached.

Fourth quarter UK dividends rose by 15.6% in headline terms to reach £17.3bn. Underlying dividends also rose in the fourth quarter, rising by 15.7% to £16.8bn. When excluding other one-offs, dividends in the final quarter of last year rose by 10%.

For the full year, a higher payout from the enlarged British American Tobacco made the single largest contribution to growth, but the mining sector collectively accounted for most of the increase. Banking dividends also did well, marked by the restoration of RBS’s payout after ten years, and Standard Chartered’s.

According to the study, which is the most comprehensive dividend study published each year, nine out of ten sectors raised payouts in 2018. Falling share prices in the final quarter of last year combined with rising dividend resulted in the highest yield of income seeking investors since March 2009. Over the next year, shares are forecast to yield 4.8%.

The top 100 companies by market capitalisation are expected to yield 5%, with mid-cap shares forecast to yield 3.3% in 2019. The last time UK company shares had such an attractive dividend yield was during the economic recession of 1991.

Compared with this time last year, when the collective UK equity yield stood at 3.6%, the forecast of 4.8% this year will be welcomed by all investors, especially those seeking an income. This forecast also means that UK dividends would need to fall by almost a quarter in order to bring the current equity yield into line with the long-run average. It’s an unlikely scenario, as the peak-to-trough decline in UK dividends during the global financial crisis of 2008 was a little under 15%.

When compared with other investment asset classes, UK equities are now yielding substantially more. The benchmark 10-year gilt yield, for example, saw its yield fall back to 1.24% in the final quarter of last year, with global economic concerns prompting a flight to safety and pushing down yields. Average interest rates on cash savings stand at 1.5% and commercial property is yielding an average of 2.8%.

Link is forecasting headline dividend growth of 4.2% in 2019, resulting in a total payment to investors of £104.1bn, another new record amount. Underlying growth (which excludes special dividends) is forecast to be 5.3% which would push UK dividend payouts to a record total of £101.1bn. Based on the current exchange rate for Pound Sterling, this includes a gain of £1.7bn, or 1.6 percentage points.

“2018 was a terrific year for dividends but a terrible one for share prices. That’s pushed yields to extraordinary heights. “A very high yield is often a sign of trouble ahead, as investors know that company earnings evaporate very quickly when the economy turns down. Dividends are less volatile than profits, as companies tend to smooth the cycle, but they can still be expected to fall if the economy shrinks. “We still expect 2019 to break new dividend records, but our forecasts are not especially bullish – one or two companies face difficulties and the easy wins from the mining sector are behind us. “Even so, a 4.8% yield implies an overly pessimistic view. The current disconnect between the level of dividends being paid and share prices doesn’t obviously mean share prices must rebound any time soon. The yield may stay elevated for as long as uncertainty persists. “But if the world does sink into a recession in the next couple of years, or Brexit goes badly, the drop in dividends is likely to be in the 10-15% range, not the 25% or so currently implied by the market.”


Justin Cooper, chief executive of Link Market Services

Dividends represent a valuable component of the total return received by investors and all investors should be celebrating another strong year for UK dividends, despite recent market volatility.

Jon DoyleUK dividends breaking new records