Another strong year for dividends

It has been a pretty lucrative start to the year for shareholders, with UK companies having paid them £14.2bn in dividends*.

These first quarter pay-outs were boosted by the bumper profits made by the oil sector, according to the Link Group’s latest UK dividend monitor. And the good news is that headline dividends for the whole of 2022 are on track to hit £92.2bn, even though this is slightly down 0.8% year-on-year.

Here we look at the sectors and companies that have delivered so far this year – and the investment funds that may stand to benefit.

What are dividends?

Dividends are sums of money paid by companies out of their profits or reserves. The amounts are decided by the board of directors and approved by the shareholders.

As well as being a lucrative source of income for investors, dividends also benefit the companies themselves. Those that reward investors with regular pay-outs often enjoy greater demand for their shares on the stock market. This helps bolster their stock prices and valuations, so it’s a win-win situation.

Overview

Two dividend totals have been published for the first quarter of 2022. It’s important to look at both of them when assessing the health of the UK stock market.

The first is the headline figure of £14.2bn, which includes £934m of special dividends*. These are often one-off payments linked to specific events, such as the sale of a business.

Although the total is 24.9% below the same period in 2021, this doesn’t tell the whole story, as Tesco paid a very large one-off dividend last year, and mining giant BHP has now departed from the London Stock Exchange (LSE) and migrated to Australia, consolidating its dual listing into one.

The second figure is the underlying total – excluding special dividends – which came in at £13.3bn*. This was 4.2% higher than the first quarter of 2021*.

Special dividends

Special dividends totalled £934m in the first quarter – much lower than the £6.2bn paid in the same period last year*. This reflects the volatile one-off nature of these payments.

The largest special dividend this year, of approximately £250m*, has come from B&M European Value Retail, which is enjoying strong trading at its discount stores. Retailer Next distributed £213m, while Royal Mail handed back £200m in dividends (and a matching amount in share buybacks) as it shared the profits of booming online spending*.

Industries and sectors

Investors in the oil sector have been the biggest winners in the first quarter, according to the Link Group’s report. It pointed out that the “astonishing rebound in oil prices” had delivered a dramatic turnaround in fortunes over recent months.

“After oil dividends were cut sharply during the pandemic when crude prices crashed, there is a lot of headroom for growth now that the oil majors are enjoying a big increase in their cash flow,” it stated.

Meanwhile, the healthcare sector’s first quarter increase mainly reflected AstraZeneca’s much larger size following its acquisition of rare diseases specialist Alexion in the US.

Regular dividends from general retailers remain a fraction of their pre-Covid-19 strength, but the situation is expected to improve on the back of growing confidence.

Elsewhere, mining companies made no significant contribution in the first quarter, but they should make up for this later in the year.

UK yield

Looking ahead for the next twelve months, the Link Group expects UK companies to yield 3.7%, meaning that £100 invested today is set to generate £3.70 in income for investors*.

Its expectations for top 100 dividends have improved over recent months, while share prices ended the quarter at almost the same level as the start. “Meanwhile, mid-cap stock prices have fallen sharply, reflecting investor concerns over the economy and inflation,” it stated. “This has pushed the yield on mid-cap stocks higher, rising to 2.4%.”

Outlook

So, what is the outlook for the rest of 2022? Well, recent months have seen commodity and oil prices soaring, bolstering the prospects for two of the UK’s biggest dividend paying sectors. Banking pay-outs have also continued their “post-Covid-19 recovery” at a slightly faster pace than expected, according to the Link Group.

“We now expect headline dividends to reach £92.2bn this year, a fall of 0.8% year-on-year reflecting lower one-off specials and BHP’s departure from London,” it stated.

Underlying pay-outs should be £85.8bn, which will be 11.1% higher than 2021*. “Mid-cap companies are likely to suffer a greater impact from the constraints on consumer demand caused by cost-of- living increases, but the biggest companies are more insulated or are even benefiting – notably the oil and mining sectors,” it added.

Investment funds and trusts

Bearing in mind the outlook for dividend payments, which funds could be worth considering?

Given the uncertain environment, it’s important to ensure portfolios are diversified across geographies, sectors, industries, and investment styles.

That’s the opinion of Adrian Frost, Nick Shenton and Andy Marsh, who co-manage the Artemis Income fund.

“We try to own businesses with significant competitive advantages in their industries with high barriers to entry, allowing them to protect their margins and exert pricing power,” they said.

Dividends are also an important part of the Schroder Income fund. This means stocks will be favoured that have dividend potential, as well as being significantly undervalued.

In a recent fund update, managers Kevin Murphy and Nick Kirrage insisted it was wrong to say that big UK dividend payers were dinosaurs that can’t grow and don’t change. “Following the market-wide dividend cut of 2009, the UK market compounded dividends at an annual growth rate in the high single digits for a decade as companies came back to the register and the economy rebounded from the effects of the global financial crisis,” they said.

If you want more of a global approach, then there’s the TM Redwheel Global Equity Income fund which is managed by Nick Clay. While the fund itself may be new, the team – led by Nick Clay – is highly experienced, and the investment strategy is well-proven. It has a true contrarian nature backed up by a logical and disciplined philosophy.

And of course, if you want peace of mind over dividend payments, an investment trust that can dip into its revenue reserves to maintain its payouts is of course an option.

The Association of Investment Companies published the latest list of 17 dividend heroes recently – investment trusts which have consistently increased their annual dividends for at least 20 years in a row.

Among those are Elite Rated City of London, with 55 years of dividend rises, and BMO Global Smaller Companies with 51 years.

*Source: Link Group, UK dividend monitor, issue 49, Q1 2022

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.