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Dividend dilemma: ignore poor growth and focus on the future

Dividend dilemma: ignore poor growth and focus on the future

UK dividend payouts have come crashing down to earth over recent months, growing at their slowest rate for more than three years, but experts have said investors should focus on long-term prospects.

According to the latest Capita Dividend Monitor, shareholder payouts between April and the end of June grew at just 1.2% to £25.8 billion, the lowest quarterly increase since 2010, with the exception of an unusual first three months of 2013.

The report highlights sterling strength as the prime reason for the slowdown, with the currency impairing overseas income earned by UK companies.

The pound finished the second quarter at US$1.71, having moved up by 2.6% over the three-month period. By the end of June it was actually 12.5% stronger against the greenback compared with 12 months ago.

As a result, Capita has again lowered its full-year forecast for dividend income, having already cut it by £1.7 billion in April.  It has now reduced it by a further £900 million, from £99.4 billion to £98.5 billion for the year.

Laith Khalaf, senior analyst at online stockbroker Hargreaves Lansdown, said income investors should be focusing on the long-term dividend story rather than paying too much attention to quarterly movements.

‘While dividends may be growing more slowly than this time last year, they are still growing, and still look relatively attractive in a world hungry for yield,’ he said.

‘Capita’s analysis suggests the strength of sterling has impaired the dividends paid by the UK’s biggest companies. It is hard for equity investors to protect themselves from currency movements, which tend to be unpredictable, and can work for or against them. One way of doing so is to diversify into UK mid and small-cap companies, which have less overseas earnings than the big blue chips.’

Commenting on Capita’s research, Justin Cooper, chief executive of shareholder solutions at Capita Asset Services, said: ‘Investors saw dividend payouts begin the year with a bang thanks to Vodafone’s big special, but just one quarter on headline growth has become a whimper as the serious headwinds facing investors reasserted themselves. Given their size and contribution to the total amount paid out, income investors are a hostage to the fortune of the very biggest listed companies.’

But Cooper was optimistic investors would see a pick-up in 2015. He said: ‘It is hard to imagine the currency continuing to detract from growth, and if the pound maintains its current level, it will only have a small impact in the first half of next year. Equally, if as forecast, the global economy picks up speed, it will be felt right at the top of the FTSE 100, and this should filter its way into investors’ pockets.’

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