Don’t forget the dividends
31/01/2012
- UK dividend payouts rise to record levels
- Dividends contribute two-thirds of total equity returns
- Many blue-chip companies yielding double the level of cash returns
Further evidence of the disparity between the prevailing macroeconomic concerns and the health of many companies came from Capita Registrars' report on UK dividends in 2011. British companies handed out a record £67.8 billion in dividends last year; the first rise since the financial crisis took hold in 2008. Reflecting the fact that many companies have strong balance sheets, unlike debt-laden individuals and governments, the payouts represented a 19.4% increase on 2010 and expectations are that this upward trend will continue, with an increase of 11% forecast this year.
Of course, last year's improvement was from a low base, coming on the back of banks and other companies scrapping dividends in 2009/10 and the suspension of the BP dividend following the Gulf of Mexico disaster.
The slow drip-feed of dividend income is often overlooked by the headline writers who focus on fluctuating share prices, but an oft-quoted fact is that about two-thirds of equity returns are from dividend income. Over the last decade, the FTSE 100 Index is up just 12%, but up 60% including reinvestment of dividends. With the same index currently offering a prospective yield of 4.4%, UK shares present an appealing alternative income stream for those with cash languishing on deposit who are willing to increase their risk levels.
But it is dividend growth that matters as much as the absolute level of income paid. Whilst the UK has long been seen as the traditional source of equity income, the ‘dividend culture' is well established in many other countries - there are more than 90 companies in the US which have increased their payouts to shareholders every year for at least a quarter of a century. Indeed, of the top 100 global companies based on dividend yield, only 5 are UK companies whereas 45 of them are in Western Europe. Just ten years ago, only 5% of companies in the FTSE World Index yielded over 3%; today 30% of those companies achieve that benchmark. But in these testing times, in order to negotiate the road ahead, it is vital that investors discriminate between high yields that are a function of a company in trouble, whose share price has hit rock bottom, and those paid by cash-generative companies that are, for whatever reason, undervalued.
