Every £20 invested in UK stocks produced £1 of income in 2019

UK dividends soared to a new record in 2019, but 2020 could see declines, according to the latest Dividend Monitor report from Link Group. Dividends rose 10.7% in headline terms to £110.5 billion last year – more than double the level they reached a decade ago*.

To put this huge sum into context, for every £20 invested in the UK stock market at the beginning of 2019, investors earned an average of £1.02 in income from their shares.

However, the rise was boosted by some £12 billion of special dividends (from miners, banks, IT, housebuilders, hotel and leisure companies and industrials) and underlying growth was just 2.8% – the slowest increase since 2014*.

In its report, Link Group explained: “Over the course of 2019, the largest 100 companies performed more strongly than their mid-cap counterparts, many of which suffered from the relative weakness of the UK economy. But the top 100 growth rate was flattered by exchange-rate effects. Neither group did well once special dividends and exchange rates were factored in.”

Banking dividends finally back to pre-crisis levels

The biggest dividend-paying sector, oil, gas & energy, showed no growth in 2019. Meanwhile, mining companies – which have provided the main engine of UK dividend growth in the last four years, increasing their payouts six-fold since the commodity slump of 2015-2016 – saw their payouts boosted by huge special dividends from Rio Tinto and BHP.

Banking dividends rose by a third*, making 2019 the first year to see larger payouts than 2007 – indicating just how long it has taken for the sector to recover from the global financial crisis.

The weakest performance came from the telecoms sector, which is suffering from heavy investment needs and weak pricing. The total paid fell by over a quarter year-on-year*, following a steep cut from Vodafone, though most companies in the sector either reduced their dividends or only managed to hold them steady.

25% losses: potential impact of dividend cuts

The top five dividend-paying companies in the UK represent 34%* of total dividends paid. The top 100 make up 85%, with mid-caps representing 13% and the rest of the UK market just 2%*.

With this concentration in mind, a dividend cut – like the one from Vodafone last year – can make a huge impact on the income earned from portfolios, as well as the invested capital.

Indeed, according to Liontrust, if the ten largest contributors to the UK stock market’s yield were to cut their dividends by 25%, the capital loss of the FTSE All Share would be 12.6%*. If they cut their dividends by 50% the capital losses would be in excess of 25%**.

Equities still top for income

Link Group believes that the big engines of dividend growth over the last few years – miners and banks – are less likely to propel dividends in 2020. The stronger pound and likely lower special dividends could also depress growth.

That said, it predicts UK shares will yield 4.1% in 2020 (down from 4.3% in 2019), with the top 100 companies yielding 4.2% and the mid-caps 3.0%*.

With 10-year UK government bonds yielding less than 1%*, cash instant-access savings accounts yielding less than 1.5% and residential property yielding less than 3%*, UK equities continue to provide attractive income levels.

Four equity income funds to consider

1. Royal London UK Equity Income

This core equity income fund invests in high yielding UK stocks. The manager aims to build a portfolio suitable for all market conditions by prioritising the amount of free cash flows of his stock selections to make sure dividend payments are sustainable. 90% of holdings are in the FTSE 350. The fund has an historic yield of 4.46%^.

2. LF Gresham House UK Multi Cap Income

This is a concentrated multi-cap income fund, with a bias towards smaller companies. Manager Ken Wotton deliberately ignores parts of the market, such as oil and gas, mining and property and concentrates resources on areas where his team has an edge. He also prefers simple businesses with a clear strategy and a large market opportunity. The fund targets a yield of 4%.

3. GAM UK Equity Income

This UK equity income fund invests in companies of all sizes. The manager is targeting a yield higher than that given by the UK stock market, as well as steady dividend growth. He is not afraid to adjust the portfolio around quite rapidly and can invest some money in a company’s bond if he feels the opportunity is better. The historic yield is 4.3%^^.

4. ASI UK Income Unconstrained Equity

The manager of this fund looks for non-consensus ideas, so the fund can differ dramatically from others in the equity income sector. It is essentially multi-cap with a mid/small bias. Under the manager’s tenure, the fund has grown its distribution very successfully and has an historic yield of 4.75%^^.

*Source: Link Group UK Dividend Monitor, Issue 40, Q4 2019
**Source: Liontrust, Morningstar & Bloomberg up to 31 October 2019.
^Source: Fund factsheet, as at 30 November 2019
^^Source: Fund factsheet, as at 31 December 2019

The views of the author and any people interviewed are their own and do not constitute financial advice. 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. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.