How to use a quality income strategy to find sustainable dividends

Wednesday, May 03 2017 by
How to use a quality income strategy to find sustainable dividends

FTSE 350 dividend growth hit double figures in the first three months of 2017. Most of the rise was driven by the weaker pound, which has boosted payouts declared in foreign currencies. But there are signs that this exchange rate sugar rush could soon wear off.

Without a pickup in profits growth - which is usually the main driver of dividend increases - a slowdown in dividend growth could be on the cards by as soon as the third quarter. So in the hunt for income stocks it’s more important than ever to pay attention to whether eye-catching dividends are sustainable.

The latest dividend figures from Capita Asset Services show that UK payouts rose to £15.4bn in the first quarter. That was up by 9.5% on the same period in 2016. Stripping out the impact of special dividends, which fell to a six year low, dividend growth came in at a record 16.2%.

Source: Capita Asset Services

To understand how exchange rates affect dividends, it’s worth exploring where the payouts come from. During the average year, a little over two-fifths of overall UK dividends are declared in foreign currencies. But in Q1, the weighting actually rises to three-fifths of the total payout. Given the devaluation of sterling since last year’s EU referendum, these sorts of currency effects come into sharp focus.


As a result, the impact of the lower pound added £1.7bn to the total payout in Q1 - or 12 percentage points on the headline growth rate. Most of the rest was down to a whacking rise in the dividend payout from the mining giant, BHP Billiton. Without these two factors, underlying dividends would have actually fallen year-on-year.

In terms of sector performance, the best dividend growth was seen in oil, gas and energy, resources and commodities, consumer goods & housebuilding, and telecoms. But growth fell in retail & consumer services and healthcare & pharmaceuticals.

In the FTSE 100 - where around 70% of revenues come from overseas - dividend payouts increased by 16.8%. But nine-tenths of that was attributable to weaker sterling, suggesting that underlying growth was quite weak.


By contrast, in the FTSE 250 - where some 50% of revenues come from overseas - nine-tenths of payouts are declared in sterling. So according to Capita, the impact of exchange…

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

Do you like this Post?
10 thumbs up
0 thumbs down
Share this post with friends

8 Comments on this Article show/hide all

Trident 3rd May '17 1 of 8

For smaller companies I sense that some stock s like Card Factory are coming back into focus by the market following a period of love with Growth stocks.

| Link | Share
timk 3rd May '17 2 of 8

Why exclude financials?

| Link | Share | 1 reply
dmjram 3rd May '17 3 of 8

In reply to post #182203

The use of the Z score means they won't have data for that key part of the screen - it isn't a ratio that can be calculated for financials.

| Link | Share | 1 reply
timk 3rd May '17 4 of 8

In reply to post #182215


| Link | Share
lightningtiger 4th May '17 5 of 8

Because of the weak pound dividends from the US market have done better than the UK for me personally and paying monthly as against say twice a year in the UK.
Having said that the dividends paid have to come from profits from the company in the first place and is an extra bonus with the dividend payments as icing on the cake and the re investment of good consistent dividends starts to pay off as the magic of compound interest begins to take place.
It is worth taking into account the total return of your shares including the dividend payment to get a clearer picture of the total "worth or gain" you are getting.
As an example GLAD in the US is paying around 8.5% monthly and the growth over the year of the share price is about + 40%. Adding the two together we have a total of 48.5%.return.
On the other side of the coin JD in the UK only pays a small dividend of less than 1% but as a growth share it has almost increased by 100% over the year, which in total is a better return than 48.5% from GLAD and the option to top slice if you want to or increase your holdings in the share.
There is more than one way of skinning the rabbit.
It is worth doing the sums.

| Link | Share
Stephen Bland 4th May '17 6 of 8

...Those problems were caused largely by a lack of diversification and an over-reliance on certain mining stocks...


...Diversification in the screen results is still fairly limited...

In my view, for an equity income investor diversification should be an unwavering feature of the portfolio so as to reduce risk.

My HYP system insists on wide diversification and this is the most fundamental rule of the strategy. I'd say it is reckless to promote an equity income approach that lacks diversification because the risks are too high for investors who are probably depending on that income.

Choosing equities for income naturally brings with it unavoidable risks, but there are ways to lower it and diversification is the most obvious method. There are several other risk reduction factors I use too, such as equal investment in each share or sector and sticking to big caps.

Investors who decide to hold shares for income have to seek the lowest risk way of achieving their aim. Lack of diversification is really just plain daft, an excessive risk not balanced by the possibly higher income, and I fail to understand why any experienced person would advocate an undiversified portfolio for an income investor who needs that income.

| Link | Share
coniston 4th May '17 7 of 8

I take Sb view ,a totally inappropriate portfolio skewed to cyclical sectors with far to much risk in so few sectors.Fine if your an aggressive investor that understands the risk of a concentrated portfolio. .

| Link | Share
Stephen Bland 7th May '17 8 of 8

...Fine if your an aggressive investor that understands the risk of a concentrated portfolio.

I wouldn't give this portfolio even that little credit. In any event, income investors are not aggressive and do not want the risks that concentrated portfolios bring. A trader might but the article was supposed to be about a "quality" income approach.

Look at it in detail. There are nine shares. Already inadequate for an income portfolio but then of those, four are housebuilders and two are miners. Crazy. On top of that, one of the miners is Anglo American which has suspended dividends since the last payment in September 2015 and is then chosen here for a "quality" income portfolio!

| Link | Share

Please subscribe to submit a comment

About Ben Hobson

Ben Hobson

Stockopedia writer, editor, researcher and interviewer!


Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis