Pressure mounts on 2016 UK dividends

Investors can expect a drop in the level of income after a strong payout in 2015, according to Capita Asset Services’ UK Dividend Monitor.

CAS’s preliminary forecast for 2016’s FTSE All-Share dividend total was £89.8bn, 3 per cent more than 2015, “though, with uncertainty surrounding the highest dividend payers in the UK” the group warned that downside risks threatened to pull this modest figure into negative territory.

The poor outlook was underscored last week with mining firm Glencore’s announcement that it would scrap its 2016 dividend payments in a bid to preserve £1.5bn in cash. The CAS report added that dividend growth among commodity stocks was “mostly due to the stronger dollar” and that outlook for the sector was troubled.

Justin Cooper, chief executive of Shareholder Solutions, part of CAS, said: “Profits are lower relative to dividends than at any time since 2009, and we have seen some of Britain’s biggest dividend payers announce drastic cuts for the year to come, with the prospect of more to follow.”

Those seeking to use investment trusts to provide such diversification can fund 18 trusts yielding 4 per cent or more, according to a note on high-yielding investment trusts issued by stockbroker Stifel. These ranged from Schroder Income Growth’s yield of 4 per cent to BlackRock World Mining with a yield of 8.8 per cent.

Investment trust managers can use revenue reserves in bad times to maintain payout levels - a form of smoothing of the income stream - but so far managers have not been doing this, analyst Stephen Peters of stockbroker Charles Stanley has said.

Mr Peters claimed that very few trusts have used their revenue reserve since 2012. But, Mr Peters added, “Some well-known names - Blackrock World Mining, Murray International - are or have used reserves in the last year or plan to do so. It is perfectly acceptable to do that - that is what they are for. One would worry for long-term capital returns if it persisted for a long time.”

However, Matt Hudson, head of the business cycle team at Schroders, was more optomistic about 2016. He said: “The UK market generates approximately £80bn of dividends every year, so it’s a very deep pool in which to invest for income.

“While we have concerns about some of the high-yielding companies, this caution is more than compensated for by those firms offering the potential for strong dividend growth.”

Adviser view

Philip Bailey, investment consultant for Hertfordshire based-Provisio Chartered Financial Planners, said: “For some time the market has offered falling dividends and interest rates, so income investors would have seen a decline in that time. What we advocate is constructing a portfolio composed of both income and growth, determining what level of income is appropriate for it and drawing this down from a combination of both elements.

“But otherwise if you are looking around for higher yields than is available from the market this will generate a higher level of risk. Just today we saw a flyer for an investment based on student accommodation generating 10 per cent yield, which is an example of the enticements out there for investors.”