The FTSE 100 is throwing a great big dividend party, and everybody is invited.
UK dividends have just hit a third-quarter record after rising 6.8% to a massive £27.2bn, according to new research published today.
Underlying dividends rose 5.9%, while special dividends soared by 25.9%. The strong US dollar, up 8% against the pound over the last year, gave the party fresh zing by boosting the value of dollar dividends when converted into sterling. That added a juicy £600m to the punchbowl.
Financial Fun
The latest UK Dividend Monitor from Capita Asset Services shows that financials are driving UK dividend growth again, with payouts strong across the whole sector. Highlights included a generous interim dividend from Lloyds Banking Group, its second payment this year, as it restarts dividends after six years. There is plenty more to come from Lloyds next year, when its yield could top 5% or 6%.
Commodity stocks also showed growth despite the sector shakeout, mostly due to the stronger dollar. However, the outlook for this sector is still troubled, Capita warns. Glencore has already said that its 2016 dividends will be cancelled to save the company £1.5bn and shore up its shaky balance sheet.
Trouble At ‘Till
Dividends have also fallen victim to supermarket price wars. Total Q3 payouts fell by £1bn after Tesco scrapped its dividend and J Sainsbury trimmed its investor payouts.
Outside the FTSE 100, the party is in full swing. Mid-caps continued to show “dramatically faster growth” climbing 30.8% to £2.9bn, Capita says. That is largely because they are more insulated from negative global trends, and have more exposure to fast-growing UK economy. However, the prospective 12 month yield on the FTSE 100 is notably higher at a punchy 4.3%, against 3.0% for mid-caps.
Rosy Scenario
It isn’t all fun and games. Capita warns the outlook for 2016 is less rosy. Glencore and stricken bank Standard Chartered will cut payouts by £2bn in total, and there may be more cuts from commodity firms unless the prices of metals and minerals recover. Capita still forecasts total payouts of £89.8bn in 2016, an increase of 3.0%, which looks impressive to me in an era of zero inflation and slowing global growth.
Justin Cooper, chief executive of Capita’s Shareholder solutions, warns that profits relative to dividends are lower than at any time since 2009 and growth will slow, but he adds: “Income investors can take comfort in the fact that equities continue to offer a very attractive yield compared to other asset classes.”
Dividend Delight
In these troubling times, dividends are real party animals. The fact that savers can look forward to income of 4.3% a year from the FTSE 100 next year is remarkable, given the savings rate meltdown.
Experienced investors know that 40% of their total return is likely to come from dividends, provided they are re-invested for growth. Unfortunately, too many savers miss out because they fail to understand this. They simply look at the headline number on the FTSE 100, assume nobody is making any money, and tear up their party invitation.
Next year, UK companies will handout out nearly £90bn worth of dividends and some of this could be yours, provided you are willing to take the extra risk of investing in stocks and shares. Party on!
