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Dividend discord

Dividends from UK companies amounted to £15bn over the opening three months of the year, the highest first quarter total since 2007, the latest Capita Registrars report has revealed.

This goes to highlight the strong comeback in shareholder payouts but this headline figure should be taken with a grain of salt as it does not reflect the whole picture.

According to the Capita Registrars quarterly dividend monitor, in the opening three months of 2011, there was a big one-off dividend payout from International Power, which flattered the first-quarter figures. In addition, the group noted, some 19 companies brought their second-quarter dividends forward, adding £260m to the first-quarter tally. Strip these items out and underlying UK dividends were up by just 1 per cent in the first three months of 2011 compared with the same period last year.

The 56th edition of the annual Barclays Gilt and Equity study, published in February, also makes mention of low dividend growth. According to the study, the five-year average growth rate for UK dividends has dipped to just 1.3 per cent – a result of corporates cutting payouts since 2008

But the 2011, Credit Suisse’s global investment yearbook points out statistics that show single-digit dividend growth for markets could be conidered fairly typical, espec- ially when inflation is taken into consideration.

Real dividend growth has been lower than is often assumed, the group asserts. Its research suggests that 10 out of the 19 countries covered in its yearbook have recor- ded negative real dividend growth since 1900 and only four have enjoyed real dividend growth above 1 per cent a year.
Yet single-digit dividend growth figures are a far cry from the 10-15 per cent growth many investors have been primed to expect. While that may still be a reality at the individual company level, selecting those growing faster than the overall market will pose some challenge for fund managers.

UK equity income funds may be seeing yield uplifts feeding through from their underlying companies but they still have a way to go to get distributions back to their pre-credit crisis levels. Who can and how fast is an assessment for advisers. There is already a wide dispersion of yields on offer in the IMA UK equity income sector – anywhere between 1.16 and 7.6 per cent, according to Financial Express data.

Adding to the performance and distribution challenge is the continued issue of the UK’s concentrated divi-dend profile. According to Capita Registrars, 51 per cent of dividends paid in Q1 came from AstraZeneca, Vodafone, Shell, International Power and HSBC – a total of £7.6bn.

Capita says: “As ever, the UK’s dependence on a small super-league of dividend payers remains very heavy. Never-theless, the first quarter of 2011 saw a lesser reliance on the top five than of late although this was again mainly due to the reduced BP payouts.”

On the positive side, though, Q1 did see dividends from the mid-cap area of the market increase by 25 per cent.

Capita Registrars chief executive Charles Cryer says: “Smaller firms are much more sensitive to swings in the economic cycle, so the dramatic rise in payouts from them is a further sign of optimism.”

The rise in mid caps shows it is not all bad news for the sector and the Capita Registrars report highlighted other positive trends. For one, companies increasing their dividends now outnumber those cutting them by 3.2 to one – 156 companies paid a dividend in Q1 compared with just 40 who cut or cancelled payments.

On top of that, we are seeing a return to the payout register of BP and banks are taking up a greater share, notably coming from payments from Barclays and HSBC.

First-quarter 2010 was the last time BP paid a full dividend to shareholders and although the FTSE 100 company has reinstated payouts at £900m, they are half of what they were a year ago. So if BP’s payouts are taken out of the equation (along with the one-off payment from International Power), then UK dividends are up £1bn over this time a year ago, a more significant rise of 8.7 per cent, says Capita Registrars.

Other positives for the sector include where these dividends are coming from. While we tend to think of the defensive sectors as the best dividend payers, Capita’s report shows it is the cyclical sectors that currently dominate distributions, with defensives clustered towards the middle.

Cryer says: “Even though there are still uncertainties in the wider economy, the dividend recovery is very broadly based, indicating companies are much more confident in their financial position.”

Overall, the positive resurrection in dividends, especially in light of the still low interest rate environ-ment, continues to underpin the case for equity income investments. This is especially important at a time when the specter of inflation and its impact on investments appears ever present.

The Barclays Gilt & Equity study examines equity returns since 1899. It shows that £100 invested in equities at the end of 1899 would be worth just £180 in real terms today – unless dividends were reinvested. In that case, £100 would be worth £24,133 in today’s money. For other assets, the power of re-investment is also strong – but not quite as good as equities. The Barclays reports shows £100 invested in gilts at the end of 1899 would be worth just £1 in today’s money but £286 if income had been re-invested gross.

Certainly, the allure of income has not waned for investors. Cofunds statistics show that while the cautious managed sector accounted for some 34 per cent of net sales in the first quarter, many of the top individual sellers offered income streams.

Jupiter Merlin income was the best net seller on Cofunds in Q1 followed by Henderson MM income & growth. Distribution, dividend or income mandates accounted for 10 of the 20 best sellers on the platform in the first part of 2011.

Cryer believes the overall trend, need and demand for income paints a positive picture for investors. He says: “2011 has got off to a very strong start and underlying dividend growth will accelerate from here. Income investors are set to enjoy the best year since 2008.”

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