Are bumper dividends on the cards?

The coming months could be very lucrative for investors with companies around the world expected to pay out bumper dividends.

The encouraging predictions have been made by three separate studies that have analysed the prospects for firms in the UK, Europe and globally.

Here we take a look at the main findings – and highlight some investment funds that could stand to benefit over the course of 2022.

What are dividends?

Dividends are sums of money paid regularly – often annually – to shareholders by a company out of its profits or reserves.

The level of these rewards is decided by the company’s board of directors and approved by shareholders through their voting rights.

Companies that pay regular dividends are more likely to attract investors. This creates demand for their stock and helps bolster share prices.

UK dividend situation

UK dividends finished 2021 in significantly better shape than 2020, soaring 46.1% to £94.1 billion on a headline basis, according to the latest Dividend Monitor from Link Group*. It was helped by one-off special dividends that boosted the total by a record £16.9 billion, three times their normal level.

While most sectors enjoyed growth during the year, there were particularly strong performances from mining companies, while restored banking dividends also had a large positive impact.

For 2022, Link Group predicts underlying growth of 5%. However, special dividends are very likely to be much lower, meaning headline dividends being down 7% to £87.5bn. Ian Stokes, the Link Group’s managing director, corporate markets UK and Europe, is upbeat about the outlook for UK dividends, despite headwinds such as Covid-19 and inflation.

“As the pandemic continues, it would be easy to take a knife to our expectations for dividends for the coming year,” he said. “We are, however, cautiously optimistic that most sectors can deliver growth.”

Research Elite Rated UK Equity Income funds

European dividend situation

A survey by Allianz Global Investors** predicts equity investors can look forward to an increase in dividends in 2022, with European dividend payouts expected to reach record highs.

After a Coronavirus crisis-related slump in dividend payments in 2020, companies in the MSCI Europe index raised payouts last year by around a third, to a record €378 billion**. According to AllianzGI estimates, a further increase in total dividends of about 8% to approximately €410 billion is expected in 2022**.

Dr Hans-Jörg Naumer, head of global capital markets & thematic research, and the study’s author, said: “As the world recovers from the effects of the pandemic, dividends continue to make a substantial contribution to the return on equities, especially in Europe.” He pointed out that they remained important for investors. “In a time of disruption and change, they show a degree of reliability that is very welcome,” he added.

Global dividend situation

Research by the Henderson International Income Trust*** suggests 2022 will deliver record profits in North America, Emerging Markets, and Asia Pacific ex Japan. The prediction is this will take the world total up another 14% year-on-year to a record £2.19 trillion, with further progress expected in 2023.

The study also expects dividend payouts to surpass the pre-pandemic high and be safer, as dividend cover (the measure that shows their ability to pay dividends) of global companies is expected to be 2.4x in 2022 – the widest margin since 2013***.

Ben Lofthouse, the trust’s manager and head of global equity income at Janus Henderson, said 2021 proved that diversification was extremely important for income investors. “As we stand, dividend resilience has improved markedly, but this is simply not reflected in the share prices of many dividend-paying companies around the world,” he said.

He pointed out that income was a vital component of an investor’s return but emphasised that income-paying equities only create value for investors if they are sustainable and growing. “Well-run, profitable businesses that are both focused and efficient in their deployment of capital are most likely to flourish,” he said. “Dividends are a good indicator of such companies.”

Here are some funds that pay close attention to dividends:

M&G Global Dividend

Manager Stuart Rhodes focuses on companies with the potential to grow their dividends over the long term and invests across a wide range of countries, sectors and company sizes.
Stocks are selected with different sources of dividend growth to build a fund that has the potential to cope in a variety of market conditions.

The City of London Investment Trust

This is one of the longest-running investment trusts in the UK and has been run by Job Curtis, for almost three decades. It aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It has increased its dividend payment every year for the past 54 years.

LF Montanaro European Income

Manager George Cooke focuses on small and medium-sized businesses in Europe, which offers him a huge choice of investments that are under-researched by the wider market. He looks to provide a stable and growing income stream from a broad range of European companies.

JPM US Equity Income

Despite the naturally lower yielding nature of the US market, it has a long history of dividend payments and an increasing number of companies now paying a dividend. Lead manager Clare Hart invests in a diverse range of names to ensure a stable, above-market yield. Each stock will yield a minimum of 2% when it enters the portfolio.

Matthews Asia ex-Japan Dividend

Yu Zhang, the fund’s lead manager, blends stocks exhibiting dividend growth with more stable, established yielders – but the objective is focused on total returns and the final yield is an outcome of the process, rather than a target. The fund will invest across the region in firms of all sizes and will have a significant proportion in medium and small-sized companies.

Baillie Gifford Japanese Income Growth

This fund aims to benefit from the improving corporate governance in Japan, as more and more businesses move towards a progressive dividend-paying policy. The managers apply the same well-tested growth investing philosophy and process used by their other Elite Rated funds, combined with a focus on companies with the best dividend growth opportunities.

Magna Emerging Markets Dividend

Emerging markets have previously been viewed as a high-risk investment for those seeking growth, but in recent years more emerging market stocks have started to make distributions. This fund is designed to capitalise on both these trends by offering exposure to emerging market companies that pay higher than average dividends.

*Source: Link Group, UK Dividend Monitor, Q4 2021
**Source: Allianz Global Investors Dividend Study 2022
***Source: Janus Henderson, January 2022