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Income-seeking investors will be pleased to hear that UK dividend growth beat expectations during the third quarter of the year.
From July through September, total payouts (excluding special dividends) rose by 6.9% year-on-year to £31.6 billion across the UK stock market, according to Link Asset Services’ UK Dividend Monitor. This represented the biggest payout on record since Link launched this study in 2007.
Mining companies contributed the most to dividend growth, with payouts up £1.4 billion year-on-year, which represented a 41% increase. Glencore was a key driver: the commodities trader almost tripled its total dividend payment to £1.1 billion. Meanwhile, BHP Billiton and Evraz also made big increases.
Banks, which have largely remained in the shadows for UK income investors over the past decade, staged a comeback over the three months to October. Barclays led the way, raising its interim dividend by 150% (£257 million) year-on-year, while Lloyds increased its payout by a tenth.
Retail companies on the other hand – especially those on the beleaguered high street – proved disappointing. For example, M&S and Dixons Carphone delivered flat dividends, while Debenhams halved its payout.
The study showed that the largest 100 listed companies in the UK experienced stronger dividend growth than medium-sized companies, as measured by the FTSE 250 index. FTSE 100 dividends rose by an average of 3.7% versus 2.7% for FTSE 250 stocks.
What does this mean for UK equity income investors? In light of the strong third quarter, Link has upgraded its forecast for total headline dividends in 2018 by £1.1 billion to a record £99.5 billion. This would represent a 4.8% increase on last year. They point to sterling weakness, which can provide an earnings boost for multi-national companies, as well as the banking sector’s ongoing recovery.
It is worth noting that the start of the fourth quarter has been marked by a profound sell-off in global markets, which indicates that the fourth quarter may not go as smoothly as some hoped.
Against this backdrop, here are three Elite Rated UK equity income funds which have the potential to deliver for investors looking ahead:
*Source: Trust fact sheet, September 2018
**Source: FE Analytics, total returns in sterling, 1 January 2018 to 23 October 2018