The sharp pullback in the value of sterling this year has had a big impact on the stock market landscape. On one hand, the outlook for some domestic stocks and sectors has turned much more uncertain. But for others with exposure to foreign markets and currencies, these conditions are a welcome boost. One of the immediate positive results for investors is that dividends rose strongly in the autumn. But you had to tread carefully to separate the winners and losers - and that’s likely to continue.
Dividend paying shares have been a popular target for investors in recent years. Faced with low interest rates and low bond yields, the average UK stock market yield of 3.5 - 4.0% (plus capital growth) has obvious appeal. But that popularity has stretched the valuations of some solid, blue chip income stocks, or ‘bond proxies’. It’s also the case that some traditional high yielding industries like mining and supermarkets have witnessed sharp payout cuts. So where are the most promising parts of the market for dividend hunters now?
How exchange rates impacted dividends
According to new figures, dividends from UK stocks rose by 1.6% to £24.9bn between August and October. Strip out the impact of special dividends, and the rise was 2.6% to £23.9bn. Research by Capita shows that there was a big £2.5bn currency gain during the quarter. That was caused by the large dollar- and euro-denominated dividends from the likes of Royal Dutch Shell, HSBC and Unilever being translated at much more favourable rates to sterling.
But under the surface, there were areas of concern. For a start, stocks in the mining sector - which has been very strong this year - were responsible for most of the £2.2bn of payout cuts during the autumn. And more generally, despite the overall rise in dividends, average payouts fell slightly in Q3 on the same period last year.
Sectors and indices leading the dividend charge
On a sector basis, the most immediate beneficiaries of a weaker pound have been oil & gas, beverages, pharmaceuticals, banks and mining. The main sources of dividend growth have been telecoms, media, travel and insurance.
On an index basis, almost all the dividend cuts seen in the third quarter were in the FTSE 100. But the same index had almost all the foreign currency gains.
By contrast, the FTSE 250 saw the fastest…
