Long Read  

Is it time to invest in UK equity income?

Is it time to invest in UK equity income?
  (Dan Kitwood/Getty Images)

As a football fan, this is the time of the year I enjoy the least – simply because there is very little football to watch.

But this year, we have had the joy of the UEFA Women’s Euros 2022, which have broken records left, right and centre.

A crowd of 68,871 turned out to watch the England Lionesses edge a 1-0 win against Austria in the opening game and, at the half-way point of the tournament, attendance records had already surpassed the total number set at the 2017 final in the Netherlands.

Thoughts are turning to who might lift the trophy, with England’s Lionesses now 7/4 favourite to win.

The transfer market is also starting to ramp up, with lots of stories connecting every team with about 100 players from all over the world.

It is when we, as football fans, are at our most selfish – because all we want are the best players, without any thought about the cost and implications to our clubs.

It is something of a 'jam today, not tomorrow' scenario. We want those five-star players at any cost. Perish the thought that a football club thinks about saving some money for a rainy day.

You could have historically made the same case for UK dividends – for which there have been plenty of rainy days in the past few years with Brexit, the strong outperformance of growth-style investing, and the Woodford debacle all hitting sentiment hard. The impact of Covid-19 has also been well documented – in 2019, dividends from the UK market were approximately £100mn, but they were severely cut as we entered the pandemic.

But the recovery has been swift, after a stellar 2021 where dividends jumped 46 per cent. Figures from Link Group show that headline dividends are now estimated to reach £92.2bn in 2022 – aided by soaring commodity and oil prices.

The figures are not back to pre-Covid levels, but there are reasons for that, one of which is the great reset (the idea of companies paying dividends at a more manageable level) to allow management to reinvest in their businesses again.

Think back to those football clubs with the hefty transfer budgets. Instead of spending all of it on players (in this case returning it all to shareholders) some of these leading dividend payers appear to be rebuilding upon slightly different foundations. 

It is with good reason. Companies may be looking to let earnings growth outpace dividend growth to re-invest in their businesses and bolster balance sheets. This was not the case pre-Covid. A bit like fans, shareholders do not always think for the long term – they want that dividend compounding now to fund their retirement.

The benefits to this new approach are slowly becoming apparent. FTSE 100 earnings cover for dividends is now expected to rise to 1.95x in 2022, rising further in 2023. It is a far cry from the figures provided pre-Covid (it was below 1.5x in 2015 and 2016).