UK dividends grew at the slowest pace compared to global peers in the second quarter of 2016, according to data from Henderson.
UK dividends fell 3.3% year on year, the weakest performance among developed countries, according to the Henderson Global Dividend Index, which analyses dividends paid by the 1,200 largest firms in the UK. Dividends in the US have 4.6% growth while Europe dividends grow by 4.1% over the same period of time.
“Profit growth remains under pressure in the UK, limiting the potential for companies to increase dividends,” says Alex Crooke, head of global equity income at Henderson. The devaluation of sterling after the Brexit vote does not help either, as some of UK companies pay their dividends in sterling; and experienced a depreciation in payouts when compared to those coming from abroad.
While banking stocks were among the worst payers, making steep dividend cuts, GlaxoSmithKline (GSK) and InterContinental Hotels (IHG) paid large special dividends.
Investors, however, have to bear in mind the difference between those companies with the ability to grow their dividends and those that simply have high initial yields, said Mark Wharrier, co-manager of the Bronze Rated BlackRock UK Income fund.
“This distinction is likely to be particularly important if inflationary pressures start to emerge, either from a weaker sterling raising import prices, or from higher commodity prices,” Wharrier warned, adding that it is crucial to look at companies with sustainable free cash flow generation and exposure to compelling structural trends.
6 Closed-End Funds with Decades of Dividend Growth
For investors who wish to avoid the hassle of shopping around for sustainable dividend-paying stocks, close-ended funds with consecutive dividend growths over multi-decades can be an alternative investment option.
The structure of close-ended funds, also named investment trusts, allows fund managers to hold cash back in good years and then pay it out to investors in less successful years. This revenue reserve feature means trusts can sustainable and growing dividends to investors even in years when the underlying stocks’ dividends are cut.
The Gold Rated City of London Investment Trust (CTY) topped the dividend heroes chart by increasing its dividends for 50 consecutive years, according to data compiled by the Association of Investment Companies. According to Morningstar Direct, the fund has managed 3% dividend growth over the last five years alone.
Morningstar fund analyst David Holder said this fund’s success is due to its focus on income as a measure of a company’s value, with above-average dividend yield as the primary driver for a stock to enter the portfolio. He thinks shareholders can reasonably expect the annual dividend to rise each year. The trust currently yields 3.9% and it is trading at a 1.5% premium to net asset value.
Another Gold Rated trust, Scottish Mortgage (SMT) has increased its dividends for 33 consecutive years, according to the AIC. This fund has 2.6% five-year dividend growth. The fund is managed by the long-term global growth team at Baillie Gifford. The board’s aim is to pay an annual dividend that historically has increased each year at a rate higher than the prevailing rate of inflation. This trust is trading at 1.2% premium.
The Gold Rated Murray International (MYI) has 11 consecutive years of dividend growth. The fund’s five years dividends grow at 4.7% and it has 2.7% three year’s dividend growths. The fund yields 5.2% and it is trading at 3.3% discount. The fund manager Bruce Stout seeks to increase the company’s revenues in order to maintain an above-average dividend yield, Holder said.
In the “dividend heroes” list provided by the AIC, Silver Rated Bankers (BNKR) and Caledonia Investments (CLDN) made impressive records by having their dividend increased for 49 consecutive years, and Silver Rated F&C Global Smaller Companies (FCS) has dividend growth for 46 consecutive years.
