Small-cap dividends on the rise

Small-cap dividends on the rise

While UK companies have been contending with Brexit uncertainty for more than three and a half years, at an individual company level there are still well-managed businesses trading successfully, growing their earnings and paying healthy and rising dividends.

Those dividends look particularly attractive in an era of ultra-low interest rates.

Savers who look hard enough might be able to earn 1.9 per cent annually on a two-year fixed-term deposit account with a bank.

Meanwhile, at the time of writing, the dividend yield on the FTSE All Share is around 4.05 per cent.

There are pressures on UK dividends, of course.

Key Points

  • There are pressures on dividends of UK companies
  • In Aim, underlying dividends rose by 16.5 per cent in 2018
  • There are numerous small-cap companies paying strong dividends

According to the Link Group’s UK Dividend Monitor, in the third quarter of 2019, underlying dividends, calculated on a constant currency basis, were almost 3 per cent lower compared to the same period in the previous year. They were down from around £32.5bn in the third quarter of 2018 to around £31.5bn in the third quarter of 2019.

The monitor, which looks at companies listed on the London Stock Exchange’s main market, warned that 2019 will “almost certainly” have proved a temporary high-water mark for UK dividends.

What is worth remembering though is that the headline figure for UK dividends depends to a large extent on the fortunes of a limited number of UK large-cap stocks.

The Link research shows that just 15 FTSE 100 companies paid out more than 60 per cent of all UK dividends in the third quarter of 2019.

This high degree of concentration brings stock-specific risk and the decision by a single company, Vodafone, to make a large cut to its dividend has been cited as a particular factor in the decline in 2019’s third-quarter payouts.

Aim dividend growth

If we look further down the market cap spectrum though, the dividend landscape looks more encouraging.

On Aim, for example, underlying dividends rose by almost 16.5 per cent in 2018 to a record of just under £1.1bn, according to the Link Aim Dividend Monitor.

And, in the first half of 2019, underlying dividends were up by almost 14 per cent, compared to the first half of 2018.

This highlights the value of the UK’s small-cap ‘dividend dynamos’.

Many have track records of healthy dividends stretching back years and some have continued to announce double-digit dividend increases.

One example is kettle component and water filtration business Strix.

A global leader in its field, the Aim-listed company supplies international brands including Philips, Russell Hobbs and Tefal, among others.

While the worldwide market for kettles is growing at around 7 per cent a year, Strix is also broadening its revenue mix.

The company is launching a host of new products in areas including baby care (working with the well-regarded Tommee Tippee brand), water dispensers and coffee vending machines.

Certified to the highest standards of safety, its products are also more energy efficient than some alternatives.

Strix’s new Water Station product, potentially launching this year, will offer the ability to produce a cup of chilled or boiled water within five seconds.