Caution call in leap year for dividends

British equity investors received good news in the latest Capita Registrars UK Dividend Monitor. The report shows dividends paid by UK companies tot- alled £15bn in the first quarter of this year, an increase of 10.3 per cent, a level not seen since the first quarter of 2009.

The results outline what appears to be a significant jump but two events the report describes as “flattering” help to explain the rise.

A special dividend from International Power played a part in pushing the figures higher. The firm paid out £1.5bn gross, which is more than 10 per cent of the entire market’s payout in the quarter.

Another important factor is that BP reinstated dividend payments in the first quarter of 2011 totalling £900m. The company has not paid out since the first quarter of 2010 because of the Deep- water Horizon disaster in the Gulf of Mexico, which was a contributor to the poor returns of 2010.

Capita Registrars takes a cautious approach for 2011 because of the underlying effect BP and International Power have had during the first quarter.

Nevertheless, AFI panellists are enthusiastic. John Kelly, head of communications at Chelsea Financial Services, says the report reveals “possibly the first sign of economic recovery in the UK”.

He says: “Media reports tell of a strange environment. One minute we are talking about downgrades and the next it is about bumper dividend yields.

“There are green shoots showing and this says the UK economy may be on the road to recovery. But investors should not get carried away just yet because of the additional effect BP and Inter- national Power have had on these results.”

Chelsea Financial uses the JOHCM UK equity income fund for contrarian exposure to the market, which is playing the dividend theme.

Dividend Watch, research carried out by Dennehy Weller, tries to determine equity income fund dividend trends. Damien Fahy, head of research at the firm, believes dividend increases have come as no surprise.

He says: “Seventy-four per cent of UK equity income funds cut their dividend during the last calendar year compared with 2009 but a typical fund manager expectation is for a 10 per cent increase in payouts in 2011.”

The Capita Registrars report says that during the first quarter of 2011, a total of 126 companies increased the amount they paid. Just 40 companies reduced or cancelled payments during the quarter.

AstraZeneca leads the table of top dividend-paying companies for the first time, followed by Vodafone and Royal Dutch Shell. The special dividend from International Power put it into fourth place while BP’s returned dividend payout puts it in seventh place.

Data supplied by Financial Express