In September 2016, the value of dividends paid out by UK quoted companies since 2000 broke the £1 trillion barrier. Back in 2000, £42bn found its way back into the pockets of investors, and that’s expected to rise to £82.5bn in 2016. As a result, the second trillion barrier will probably be broken within the next 10 years. But that doesn’t mean life will be easy for income hunters. If anything, 2016 showed just how sensitive dividend stocks can be to political and economic forces.
Factors that impacted on dividend stocks
A handful of factors had a big influence on the dividend landscape in 2016. The first - which has been a constant since the financial crisis - was that low interest rates and low bond yields kept high yielding equities in demand. With nowhere else to go, investors in search of yield turned to dividend stocks.
Big, predictable, high yielding defensives have been a popular target for yield-starved investors in recent years. But given that some believe they’re now over priced, we saw more debate about whether these so-called ‘bond proxies’ (especially consumer staples and utilities) are actually an accident waiting to happen. Time will tell.
Meanwhile, the second development for dividends was a modest improvement in the outlook for commodity stocks… and banks. Some of the UK’s biggest dividend payers have traditionally been found in these sectors. Count among them, BP, Royal Dutch Shell, BHP Billiton, HSBC and Lloyds.
Pressure on commodity prices has called into question the sustainability of these dividends in recent years - indeed, BHP did cut its payout in 2016. Yet the rising price of oil and precious metals had a positive impact on share prices. It was enough for some to suggest that these sectors are turning a corner. As far as the banks were concerned, the big news was the re-introduction this year of a meaningful payout by Lloyds, but the sector still encountered turbulence...
The third and arguably most important influence on dividends this year was the UK’s decision to leave the EU. At a stroke, the vote for Brexit refocused attention on stocks that were less sensitive to the sudden devaluation of sterling and less exposed to the UK economy, where the outlook is now unknown.
The June 23 referendum result was a massive instant boost to commodity stocks…
