UK dividends smashed records in Q2! But is payout growth set to slow?

Dividends moved to new highs in the last quarter. But is this golden age of dividend investing drawing to a close?

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Even the quickest glance at dividend forecasts for UK-quoted companies will show just how lucrative stock market investing can be. Shareholder payouts are rocketing right now, and fresh data from Link Group reveals the breakneck pace at which dividends have expanded of late.

According to its latest UK Dividend Monitor, released today, dividends from London-listed companies soared to all-time highs of £37.8bn in the second quarter. This was up 14.5% year-on-year and topped the then-record set two years ago, by a mammoth £4.4bn.

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As a consequence of this chubby rise, Link Group upgraded its headline forecasts for the full year by £2.8bn. The annual total for 2019 is now put at £107.4bn, a sum that would represent an annual jump of 7.6% if indeed realised.

Sinking sterling and special dividends support

It’s important not to get carried away by these numbers, though. Sure, dividends may have hit new tops in quarter two but there are some pretty important items that inflated the total. Firstly, exceptionally-large special dividends from the likes of Rio Tinto, Micro Focus International and RBS contributed to that significant headline increase.

And secondly, the weaker-than-expected 5% rise in underlying dividends, to £32.4bn, was delivered mainly by favourable exchange rate movements in recent months. Link Group estimates that around half of the on-year increase was driven by the recent sinking of the pound.

Reflecting this, Link commented that: “Large-cap companies, which benefit disproportionately from the weaker pound, grew their payouts much faster than their mid- and small-cap counterparts,” with FTSE 100 companies growing dividends by 5.7% in underlying terms versus just 0.8% for mid-caps.

Dividend growth in danger?

It’s quite possible that some of the factors that drove dividend growth in quarter two could continue to drive payouts in the months ahead. Take the sterling dive, for example. The UK currency plunged to 27-month lows against the US dollar last week and it’s in danger of falling further as an upcoming Boris Johnson premiership boosts the odds of a no-deal Brexit.

It is perfectly clear, though, that the overall dividend outlook for British stocks is becoming muddier. As chief operating officer of Link Market Services, Michael Kempe, commented: “The UK’s dividend clothes are starting to look a bit threadbare underneath.

“As the world economy slows, and a looming Brexit exacerbates the underperformance of the UK economy, corporate profits are under pressure and that is limiting the scope for dividend growth.” And because of these items, forecasts for underlying payout growth in 2019 were hacked back by £500m to £98.7bn. This would represent annual growth of just 2.9%, two-thirds of which Link Group estimates will be down to exchange rate-related gains.

There are plenty of shares out there where dividends threaten to stagnate or even fall over the next 12 or so. I recently explained why Lloyds could be one such share in danger of slipping, but it’s just one dangerous stock on what is a very long list. With Brexit raging, global indicators sliding, trade tensions persisting, it’s critical to be clued up on what to buy and what to avoid.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group and Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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