Six ways to invest in an inflationary environment
UK inflation rose to 9% in April, its highest level in 40 years and almost double the rate the Bank...
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.
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.
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 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*.
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.
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%.”
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.
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.