Interim reporting season has just ended in the UK so this is an appropriate time to assess the health of dividends in this country – and they feel fine. Out of the 231 dividend announcements made over the recent period in the UK, 79% were increases, 15% were unchanged and just 6% were decreases.
Companies that raised their dividends did so by an average of 18%, which compares with growth of 26% at the same stage in 2011, although such a reduction is hardly surprising given the increasing difficulty of continually being able to ‘grow on growth’.
The global financial crisis saw dividends cut aggressively but, from that very low base, UK businesses have since managed to grow them to such an extent there have been a number of years of double-digit rises. As such, while dividends are still increasing, it seems probable what might be characterised as the ‘easy’ growth is now done. Indeed, according to shore capital’s highly-regarded income team, dividend growth in the market from here is forecast to be just shy of 10%.
The companies that have been offering the strongest dividend growth – and which are forecast to continue doing so – are, unsurprisingly, the ones that cut the most as the global financial crisis hit home. This includes a number of more lowly-valued sectors that are being ignored by most investors, including banks, life insurers and general retailers.
Conversely, dividend growth from traditionally defensive ‘high yield’ (and thus, in the current environment, highly valued) areas is expected to remain subdued – and this would include the tobacco sector recently highlighted in not all dividends are created equal.
Market sentiment looks set to stay volatile but, as we have argued many times before, investors should ignore sentiment and concentrate instead on business fundamentals. UK businesses remain understandably cautious about the future but, in the main, are still increasing their dividends. The outlook for dividends comes very much under the heading of ‘fundamentals’ and, over time, dividend increases should lead to equities moving upwards.