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.
It is designed specifically to reduce the excess water we heat up and then waste as a nation by overfilling our kettles, which is estimated to cost £300m annually.
The product may have particular appeal for the growing number for whom the environment and sustainability are priorities.
Strix raised its dividend 13 per cent at the most recent interim and yields approximately 4 per cent.
Another Aim company with a steady record of growing dividends is Mattioli Woods, the provider of wealth management and employee benefits services.
The company’s adjusted profits before tax grew 8.8 per cent for the year to the end of May 2019.
However, full-year dividends increased by even more at 17.6 per cent. A yield of around 2.6 per cent looks attractive given the rate of dividend growth.
FTSE Small Cap company Bloomsbury Publishing counts Harry Potter author JK Rowling among its writers.
It also produces academic, professional and special interest titles that are sold around the world.
Bloomsbury is growing the digital publishing side of the business profitably and global revenues have reduced the impact of Brexit uncertainty.
The company has grown its dividends for 24 consecutive years and recently announced another increase, with the interim dividend up 6 per cent.
The share price has had a strong run recently, but the stock is still yielding just over 2.8 per cent.
Chesnara is a FTSE Small Cap business managing over £7bn of life insurance and pension policies in the UK and Europe.
Following a sharp sector derating last year, the shares have begun their recovery, reinforced by positive interim results released in August 2019 that met consensus forecasts.
We believe the business is misunderstood.
It has been a consistent dividend payer over the past decade, with dividend growth supported by operational performance.
This has been achieved in challenging market environments as well as more supportive ones. For example, the company wrote down only 1 per cent of its net asset value in 2008, compared with some larger peers experiencing 9 per cent dents.
The latest interim dividend was increased by 3 per cent, which, although modest growth, is off a high-yield level of around 6.6 per cent.
While investors do not always associate small caps with attractive and growing dividends, for those prepared to look carefully, there are stocks that deliver on both counts.
This area of the market has been unloved for some time and, in our view, offers interesting opportunities.
Siddarth Chand Lall is manager of the Marlborough Multi Cap Income fund
