So fundamentals matter, and the pound won’t keep falling forever, either. Those fundamentals have been looking increasingly shaky in the UK, as a string of cuts from high-profile dividend payers such as Standard Chartered, WM Morrison, BHP Billiton and others have proved in recent years.
Looking further afield
Mid-caps’ dividend growth has proved more reliable than their larger peers’ over the past two years, according to Capita figures, but here too there are headwinds: not least the impact Brexit may have on the kind of domestically focused company more commonly found in the FTSE 250.
So where are the sustainable sources of income going to come from? The answer typically means taking a case-by-case approach, and increasingly that means broadening horizons beyond the UK.
In August, the Henderson Global Dividend Index found that underlying UK dividend growth fell 3.3 per cent in the second quarter, the worst performance among the G7 group of countries (Canada, France, Germany, Britain, Italy, Japan and the US).
UK investors going global have also been boosted by the pound’s weakness, as companies’ overseas payouts are literally worth more pound for pound. But finding sustainable sources of dividends is more difficult.
Henderson’s report did point to European companies as an unlikely source of strength. Excluding currency effects, dividends paid by the continent’s companies rose by 4.1 per cent in the second quarter despite large cuts from two of the region’s largest firms (Volkswagen and Deutsche Bank). This means two whole percentage points of payout growth were lost during the period, and the uncertainty again illustrates the importance of judging individual companies by their respective merits.
Safety first
One way of guarding against uncertainty, where dividends are concerned, is to look at the dividend cover ratio for a given firm. This simple ratio shows how many times over a company’s profits cover its dividend payouts.
On a regional basis, the winner here is perhaps a surprising one, according to recent analysis from Société Générale, the investment bank.
The bank’s European strategist Andrew Lapthorne notes that it is Japan that offers “better dividend cover than either the US, Europe or Asia ex-Japan”. He adds: “We never thought we’d say it, but not only is Japan attractively valued, it is increasingly becoming an equity income pick.”
Part of the reason for this strength is that Japanese companies have plentiful reserves on their balance sheets. The £2.4bn in cash held by the country’s corporations at the end of 2015 was twice the amount held by US firms who have been accused of ‘hoarding’ cash since the financial crisis.
