Equity Income  

What is the outlook for dividend payouts in 2017?

This article is part of
Guide to global equity income

“That said there is significant regional dispersion in payout ratios which could affect dividend growth rates in some parts of the world, and international investors will continue to see currency movements impacting the income they receive once it is translated back to their base currency.”

This is particularly true for the UK market, where the pound’s ongoing decline has had a significant impact on investments.

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The currency’s rocky ride is in light of the country’s vote to exit the EU. Now prime minister Theresa May has triggered Article 50, the pound could be set for further volatility.

Hugh Yarrow, manager of the Evenlode Income fund, calls the outlook mixed.

“Payout ratios for the aggregate market have fallen over the last few years and revenue growth remains relatively low due to a patchy economic backdrop. Corporate debt levels have also been rising, as companies have used low borrowing costs to help fund acquisitions and shareholder returns,” he explains.

“Offsetting these factors last year was the significant depreciation in sterling which is helpful for UK companies that earn and/or pay their dividends in foreign currencies. This led to a modest increase in dividends for the aggregate market last year, but without this currency benefit dividends would have fallen.”

Mr Yarrow predicts 2017 will be similar as a difficult dividend environment is offset somewhat by the weak pound. 

“The outlook for oil and commodity prices will also be important for the UK index given how important these companies are as a percentage of overall UK distributions,” he adds.

Darius McDermott, managing director at Chelsea Financial Services recalls that pre-EU referendum, there were concerns over dividend cover, particularly in the FTSE 100. 

“But with costs in sterling and most earnings in US dollars, these companies have been given some breathing space and are more likely to be able to maintain or even grow dividends this year.”

He confirms: “If the oil price steadies and the outlook for banks begins to improve we may also see these companies restarting or growing dividends.”

Commodity boost

One FTSE 100 company set to restart dividends is supermarket giant Tesco, following its announcement in January of a deal to buy wholesaler and convenience store owner Booker Group which if it goes ahead will see Tesco commit to dividend payments again from 2018.

The Henderson Global Dividend Index reports oil and mining stocks saw decreases in dividend payouts year-on-year in the third quarter.

The recovery in commodity prices should certainly provide a boost to dividends and will be a welcome relief for global equity income investors.