Equity income investors typically prefer to play the asset class close to home, relying on UK equity income funds to deliver their income requirement. But while the latest Capita Dividend Monitor for the first quarter of 2016 shows UK dividends increased 6.4 per cent to £14.2bn, it also warns that UK dividends are in decline this year.
Justin Cooper, chief executive of Shareholder Solutions, part of Capita Asset Services, suggests investors should not be too gloomy. However, slowing payouts from UK companies may prompt UK investors to turn their attention to other dividend-paying regions.
The UK is also perhaps more susceptible to concentration risk than other countries, as Alex Crooke, head of global equity income at Henderson Global Investors, points out. “Overall, we are positive on the prospects for dividend growth in the year ahead, though sectors sensitive to falling commodity prices are likely to cut payouts to shareholders,” he warns. “The UK market in particular is heavily skewed by a few large companies, many of which are in the oil and resources sectors, whose dividends are under pressure at the moment. It’s no wonder, then, that so many UK investors are looking abroad for their dividends.”
According to the Henderson Global Dividend Index for 2015, the US was the “engine of global income growth” as it pays the highest proportion of dividends. Last year, US companies increased payouts to shareholders across almost every sector by 14.1 per cent to $405.4bn (£280.5bn). The country also accounted for two-fifths of the world’s dividends.
| Should investors be concerned about slowing UK dividend growth? |
Jamie Forbes-Wilson, manager of the Axa Framlington Blue Chip Equity Income fund, believes UK equity income investors shouldn’t be too worried: “Towards the end of last year, we thought dividend growth would turn negative in 2016 but actually it’s improved slightly. It has been helped in part by the weakness in sterling and the strength of the dollar. “I think the growth we’ve seen from other companies has been slightly better than had previously been anticipated but, clearly, there’s a factor that payout ratios have increased quite substantially, which means the rate of growth is inevitably going to slow. However, in a world of very low interest rates, somewhere between 3.5 and 4 per cent dividend yield is quite attractive versus bank deposits and some of the sovereign bonds that are out there, which, in many cases, are negative yielders.” |
Patrick Moonen, multi-asset strategist at NN Investment Partners, agrees the US and UK have historically been stable dividend-payers, although he observes the composition of payments in the US is changing, with a shift towards equity buybacks and away from cash dividends.
He explains: “If you look at cash dividends in the US, you’ve got a cash yield of approximately 2.2 per cent which is, compared to other regions, relatively low; but, if you also take into account the yield coming from equity buybacks, then you have a yield of more than 4 per cent, which has been stable and attractive.”
Another developed market becoming a reliable dividend payer is Japan. The index reveals headline growth in Japan was 5.2 per cent in 2015, taking payouts to $51.9bn and making it the second fastest headline growth rate among large developed countries. However, the decline in the yen’s value did dampen headline growth and “masked an impressive underlying growth rate of 19.2 per cent”, the best of the major economies.
Mr Moonen notes the structural shift among Japanese companies that is placing emphasis on creating shareholder value has helped increase dividend payouts, as has the fact that, historically, payout ratios have been low.
“Something that will also help Japanese payouts is that Japanese companies, relative to their US or European counterparts, have a lot of cash and are generally underlevered, so they have quite a lot of room on their balance sheets to do like US companies have done over the past couple of years, what I would call some financial engineering by trading debt for equities,” he says.
Asia-Pacific ex Japan is also gaining a reputation for delivering equity income, with several Asian income funds now available to UK investors. Jason Pidcock, manager of the Jupiter Asian Income fund, which launched in March, believes there are many companies with a long track record of paying dividends in this region. Speaking to Investment Adviser earlier in the year, he suggested India and South Korea are the only exceptions, and highlighted companies in the Philippines have lower yields but offer the opportunity for dividend growth.
Annual dividends in this region were down by 5 per cent to $110.3bn in 2015, with headline growth hit by weaker exchange rates, according to Henderson.
Differentiating between those countries with high-dividend payouts and those with the potential for dividend growth over the longer term is important for global equity income investors.
Mr Moonen cites Europe as an example: “At first sight, you have quite an attractive dividend – almost 3.5 per cent. But I see two headwinds for that: one is low profit growth; this is what we expect from the eurozone – at least for this year and maybe also 2017. Second, the payout ratio for eurozone companies is almost 60 per cent, meaning there is almost no room for eurozone companies to increase their dividends above the level of earnings growth.”
Ellie Duncan is deputy features editor at Investment Adviser
