A time to reap...
Although income growth from UK stocks has been restrained in recent years, investors can expect a more abundant dividend harvest in 2015.
British companies rewarded investors with a record £97.4 billion of dividend payments last year –although one company, Vodafone, made up almost a fifth of this following the sale of its US business. Despite the headline growth – a 21% rise in overall payments in 2014 – there has been concern that, if the one-off windfalls are stripped out, regular dividend payment growth has stalled in recent years. However, the good news for investors going into 2015 is that regular dividend income from Britain’s largest corporates looks set to rise again over the year and beyond.
Although income investors have seen the growth of dividends ebb since the global recession, forecasts for 2015 look more positive – and need to be measured against low returns on cash. Investors can expect a 5.7% growth in regular dividend payments to £83.6 billion over the coming year, according to latest figures from Capita Asset Services; a welcome improvement on the 1.4% growth in 2014 (the smallest increase since the start of the decade). Of course, 2014 was dominated by the £20 billion that Vodafone returned to its investors, including its world record £15.9 billion special dividend.
In fact, an overall equity yield of 3.9% last year outstripped other asset classes, with a similar performance expected over the next 12 months. Equity income strategies continue to look favourable in light of the performance by government bonds, with the yield from UK 10-year gilts down to 1.6% in January. A flight to safety by investors concerned about the
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world economy and markets, together with falling inflation in the UK, underpinned this slide in gilt yields. Government bonds, with yields that are less than current low levels of inflation, look like poor alternatives.
Glass half full Prospects for UK dividends in 2015 look more like a ‘glass half full’ – and filling. Much of this change of perception and outlook is due to the strengthening of the US dollar, which reversed the negative effects of the strong pound in the first half of 2014. The US dollar exchange rate is important for UK dividends as around two-fifths of pay-outs are declared in the currency. The pound fell 4% against the dollar in the fourth quarter; and gained against the euro (although fewer companies declare payments in the single currency).
However, there were factors that held back dividend growth in 2014. There was sluggish profit growth among the larger UK PLCs, and warnings from a range of industries, particularly supermarkets.
The strongest
sector was consumer services, however, with retailers and travel companies offsetting lower supermarket dividends as improved consumer confidence and spending boosted earnings, while falling oil prices translated into more expendable income for households. Tesco has cancelled its final dividend, which will cost investors over £900 million in 2015.
Industrials performed well last year, including support services, transportation, construction and electronics. The utility sector also returned to growth after two years of decline. In the financial sector, dividends paid by banks rose slightly, but general insurers and estate agents helped lift earnings. Commodity stocks were hard hit by the strength of sterling and were
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