Investors enjoyed a big bump in dividends from their UK stock holdings last year, but early indicators point to a far more modest increase in 2018.
Rebounding miners, a favourably weak pound and a good crop of one-off special dividends sent total payouts up 10.5 per cent to £94.4billion – although there was a marked slowdown in dividend growth towards the end of the year.
Companies that consistently grow dividends, or even just maintain them, can bring great returns, particularly if you keep reinvesting them in more shares.
Good year: Investors enjoyed a big bump in dividends from their UK stock holdings in 2017
This makes income funds, run by managers seeking out the highest or simply most reliable payers on the stock market, a popular choice among individual investors.
Total dividends generated by UK-listed firms in 2017 got a boost from an almost full recovery in mining payouts, according to the Link Asset Services Dividend Monitor.
The weakness of sterling also helped, due to the large proportion of UK dividends declared in US dollars and euros, which are then translated at more favourable exchange rates, said Link Asset Services.
However, gains started to turning to losses as the pound regained strength in the second half of 2017 – and it has since hit a post-Brexit vote high of $1.43.
Link went on: ‘The headline total was boosted by a heavy crop of one-off special dividends in 2017, worth £6.7billion, of which almost half was down to National Grid’s £3.2billion payout from the proceeds of its UK gas distribution disposal.
‘This was the second consecutive year in which these unpredictable specials were unusually high.’ Excluding specials, total dividends rose 10.4 per cent to £87.7billion last year.;’
Number crunching: Early indicators point to a more modest increase in dividends (Source: Link Asset Services)
In 2018, Link expects underlying dividends – excluding specials – to rise 3.1 per cent to £90.4billion. But a forecast £5.5billion of special dividends could boost the total figure by 1.6 per cent to £95.9billion.
Link predicts the dividend yield from UK stocks – dividends as a percentage of share prices – will be 3.5 per cent in 2018.
The firm says dividend growth among the top 100 UK-listed companies lagged that of their mid-cap counterparts last year, and this trend is expected to continue in 2018.
‘Seasonal factors mean that the fourth quarter was dominated by HSBC, Shell, and BP, each of which has frozen its dividend in dollar terms in recent years,’ it says.
‘Because they accounted for two-fifths of all fourth quarter dividends, and contributed the lion’s share of the exchange-rate loss, it was difficult for growth elsewhere to shine through.
‘Moreover, Sky cancelled its £360million fourth quarter dividend while its future ownership was in question.’
Dividend trends: How did payouts change in each quarter over recent years (Source: Link Asset Services)
Among the mid caps, housebuilders dominated but consumer goods, leisure, telecoms and property also did well in churning out dividends last year.
Justin Cooper, chief executive of Link Market Services, says: ‘Record dividends and new highs for share prices gave investors real cause for celebration in 2017, even if one-offs and exchange-rate gains were part of the story.
‘Beneath the surface, slower but steadier growth continued in the wider market. 2018 may feel like a hangover after 2017’s excesses, as exchange gains are currently set to reverse, specials are likely to fall, and there is nothing on the horizon to match the scale of the mining bounce-back.
‘But there is no reason to be pessimistic. Slow and steady growth should continue to underpin UK dividends, but 2018 will feel sluggish compared to last year, even if it can still eke out a new record of its own.’
Sector breakdown: Miners boosted dividends substantially last year (Source: Link Asset Services)
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