Income investors were under the cosh right from the start of 2016. The outlook for dividend growth in many companies was close to zero and billions of pounds of cuts were forecast. As it turned out, the devaluation of the pound after the EU referendum helped jet-propel dividends late last year. But beneath the surface, that all-important growth was still lacking and uncertainty still abounds.
The uncertainty is made worse because there are so many moving parts in the dividend outlook. On the upside, economic growth seems to be holding up in the UK, parts of Europe and the US. Plus the lower pound will probably boost dividends again in 2017.
But not every company will benefit. The unknown impact of Brexit negotiations, rising input inflation and pressure on earnings in some sectors, mean there are likely to be bumps in the road this year. But dig into the dividend growth track record of companies and it may be possible to find those that are better placed to ride-out those bumps.
How the falling pound affected dividends
The fall in the value of sterling has had a big impact on UK dividends because two-fifths of them are paid in dollars and euros. So the exchange rate has made them worth more in sterling.
Dividends from UK companies last year, including special ‘one-offs’, rose by 6.6% to £84.7bn according to the Capita UK Dividend Monitor. That’s a decent rise of £5.2bn, but £4.8bn of it was down to the weaker pound. When you strip out exchange rate gains and one-offs, underlying dividends actually fell 3.7% year-on-year to £73.7bn.
An interesting feature of UK dividend data is the big influence of a small number of companies. Last year, Royal Dutch Shell hiked its payout by £3.2bn to £11.1bn, which made it the biggest dividend payer in the world. Together with BP, HSBC, GlaxoSmithKline and Vodafone, the top five companies accounted for 38% of all the UK dividends paid in 2016.
But more broadly, just 26 out of 39 sectors managed to produce a year-on-year dividend rise in 2016, which Capita says is below the 32 sector average since the financial crisis. And while dividends are forecast to grow in 2017, the outlook remains very uncertain.
A track record of dividend growth
Faced with this uncertainty, one option for income hunters is to…
