Dividend payouts sank in 2009 -- but some stocks still pay out handsomely.
Time and again, long-term studies of investment performance show that dividends account for a very significant proportion of total returns. Capital growth through a rising share price is good -- but regular dividends, duly re-invested, are better.
So the news that UK companies paid out £10 billion less in dividends last year -- £56 billion during 2009, against £66 billion in 2008 -- is very bad news indeed.
It's bad news for investors relying on those dividends for income, and it's even worse news for investors currently re-investing dividends in order to grow the size of their overall portfolio.
In all, according to data from Capita Registrars, a total of 202 listed companies cut their dividends during the year -- with 74 of them, around a third, paying no dividend at all.
Many of the divi-cutters are household names. Lloyds Banking Group (LSE: LLOY), Royal Bank of Scotland (LSE: RBS), Anglo-American (LSE: AAL), Persimmon (LSE: PSN), BT (LSE: BT-A), GKN (LSE: GKN) -- each either abandoned dividend payments altogether, or slashed them to a tiny fraction of their previous level.
Half full, half empty
It's not all bad news, though. Some companies held their dividends steady, while others increased them. GlaxoSmithKline (LSE: GSK), BP (LSE: BP) and Tesco (LSE: TSCO) were among 179 companies that increased their payouts, while 60 held them at 2008's level.
And the damage wasn't random, which provides some cheer as well. Some sectors -- such as oils and pharmaceuticals -- did relatively well, leaving banks, housebuilders and finance companies to bear the brunt of the recession. Overall, the banking sector paid out £6.1 billion less in 2009 than in 2008 -- well over half the total £10 billion shortfall in payouts.
In short, for investors canny enough to spot the warning signs, and courageous enough to act on those signs, the worst of the dividend drought was almost entirely avoidable.
Even so, 2009's dividends scorecard leaves investors worryingly dependent on just a handful of shares. 47% of all cash dividends paid out in 2009 turned out to have come from just five companies: BP, Shell (LSE: RDSB), HSBC (LSE: HSBA), Vodafone (LSE: VOD) and GlaxoSmithKline. Two companies -- BP and Shell -- paid out 25% of all dividend payments during the year.
Glimmers of hope
As economic recovery begins, some former divi-cutters are resuming payments. Yesterday, for example, mining giant Xstrata (LSE: XTA) said it would resume dividend payments. Others are increasing payments: yesterday, again, Randgold Resources (LSE: RRS) announced an increased payout.
Even so, I expect payment levels to remain subdued during 2010, and well into 2011. Bailed-out banks, for instance, are prohibited from making payments until 2012, while divi-cutters such as St. Modwen Properties (LSE: SMP) are not expected to pay out until 2011 at the earliest. In the case of companies such as GKN, even that may be optimistic.
So what's an investor to do?
Fortunately -- if not slightly perversely -- some of Britain's biggest dividend payers are still trading at attractive valuations. To investors looking for heady capital gains, shares such as BP, Shell, GlaxoSmithKline and Vodafone may seem yesterday's news. That's certainly the story their relative stock market under-performance tells.
But their dividend performance remains first class. A decent clutch of reliable and diversified dividend payers has always been a sound investment strategy. Now, it looks better than ever.
More from Malcolm Wheatley:
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> Of the companies named, Malcolm owns shares in Tesco, Lloyds Banking Group, BP, BT and GlaxoSmithKline.
