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Weak pound continues to drive dividend bonanza

Income investors have struck gold this year as the lowly pound boosts the value of overseas income for UK companies. Don't expect the big increases to last, however.

 
Weak pound continues to drive dividend bonanza
 

Income investors have struck gold this year as the latest quarterly dividend payouts mean 2017 will become a record year for income-seekers.

According to the latest Capita UK Dividend Monitor report, dividends reached £28.5 billion in the third quarter, up 14.3% year-on-year to become the third largest quarter on record.

The bumper quarter means Capita has now upgraded its 2017 payout forecasts by more than £3 billion to £94 billion, up 11.1% on last year.

While dramatic growth in dividends in the first half of the year was attributed to the exchange rate effect of the weak pound, the impact was lessened in the third quarter. The exchange rate to the dollar was very similar to last year and one-third of dividends in the quarter were paid in dollars ‘so these were translated into sterling without the huge foreign exchange gains of the previous four quarters’, said the report.

Part of the growth in dividends was a bumper round of special dividend payments, which account for £1.5 billion of the total. This was in large part due to a £960 million payment made by contract caterer Compass (CPG).

When special dividends were stripped out, underlying dividends topped £27 billion, a third quarter record and the second largest payout for any three-month period ever. The total was 13.2% higher than last year.

After a prolonged period in the doldrums, miners have bounced back with over two-thirds of the £3.6 billion year-on-year increase in income payments coming from the sector. Dividends from miners quadrupled in the third quarter to £3.3 billion.

‘Earlier this year we pencilled in restored payouts from all the major players, but the seam has been richer than investors expected,’ said the report.

The largest payer was Rio Tinto (RIO), which distributed £1.1 billion as its profits surged, nearly doubling its payout from this time last year. The company has also announced a share buyback programme that will see more cash returned to shareholders.

Anglo American (AAL) also surprised the market in the quarter by re-starting dividends six months earlier than expected, distributing £518 million in the process.

Outside of the mining sector, Capita said the ‘performance of the rest of UK plc seemed to lack some lustre’. The dent in dividends in the beverage sector was blamed on the loss of drinks company SAB Miller, which was taken over by AB Inbev.

BT (BT) pushed payouts in the telecoms sector higher but after a difficult year and a yawning pension deficit there are questions about the sustainability of its dividend, which at the current depressed share price offers a yield of 5.6%. 

Lloyds (LLOY), which returned to the dividend list two years ago, continues to provide almost all the dividend growth in the banking sector and a yield of 4%.

The beleaguered retail sector was ‘a mixed bag’, as Sainsbury’s (SBRY) cut its payout on the back of poor profit performance and Marks & Spencer (MKS) didn’t repeat its special dividend of last year.

High street giant Next (NXT) paid the second in a series of four specials which the report said inspired ‘confidence in the company’s financial position against a more difficult consumer spending backdrop’.

Justin Cooper, chief executive of shareholder solutions at Capita Asset Services, said investors have ‘struck gold at this year’s haul easily smashed the previous record set in 2014’.

However, he warned the ‘lustre will dim markedly in the fourth quarter’ as the ‘potential for further upside surprise has diminished’.

‘Exchange rate gains will be gone in 2018, unless the pound takes another jolt downwards as the Brexit talks unfold, and most of the big companies who cancelled dividends in recent years have already restarted them, so that additional sparkle will have dulled. Even so, the overall value distributed by UK plc is likely to remain at or near 2017’s record levels.’

Four income funds

Dividends may slow but income seekers will be searching even harder as inflation has reached 3% but wage growth has remained static.

Maike Currie, investment director for personal investing at Fidelity International, recommended four funds for investors hunting for income, including Invesco Global Equity Income managed by Nick Mustoe, who Currie said has a ‘depth of expertise’ that he uses to ‘find the very best ideas in a crowded market’.

She also tipped JOHCM UK Equity Income , managed by Clive Beagles.

‘The fund’s investment process focuses on dividends, with a strict yield discipline whereby every single stock in the fund must yield more than the market average on a 12 months prospective basis,’ said Currie.

Fidelity Global Dividend , run by Dan Roberts, also made the list ‘given his razor sharp focus on preserving client capital’, as did Invesco Perpetual European Equity Income , managed by Stephanie Butcher.

Currie said Butcher had a ‘focus on finding dividend-paying companies with attractive valuations’ and is less concerned about sector or countries meaning she ‘does not shy away from the out of favour areas of the market where the best opportunities are often found’.

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