While the economic environment may seem like it’s improving on the surface, dividend shares have been cutting their payouts. At least, that’s what the latest report from Computershare revealed. In the second quarter of 2023, UK dividends fell by 9% versus a year ago, which translates into £3.2bn of shareholder income disappearing.
That certainly sparks questions about the sustainability of the elevated yields throughout the FTSE 350 today. However, such concern may be unwarranted taking a closer look at what’s been going on under the surface.
Dissecting these shares
A 9% slide in payouts is fairly significant across the entire British stock market. So what caused it? This decline can be partly explained by the adverse state of exchange rates between currencies. After all, not every company listed on the London Stock Exchange rewards shareholders in pounds sterling. However, the bulk of the decline was actually triggered by an 86% decline in special one-time dividends.
With the macroeconomic environment being significantly tighter today than a year ago, it’s not surprising to see one-time shareholder payouts evaporate. Even more so considering that the price of commodities has largely normalised from supply/demand imbalances.
But what’s exciting is that when stripping out the effects of special payouts, dividends across the UK actually grew by 3.5% to £32.2bn. In other words, the high yields today may be more sustainable than many might think.
Best buying opportunities?
In recent years, the mining sector has been stealing the show with monumental payouts. After all, surging prices for coal, copper, nickel, and especially iron enabled natural resource businesses to see their balance sheets flooded with cash.
As previously mentioned, things have since stabilised. And overall, British mining stocks have been cutting back on their payouts in the weaker pricing environment, resulting in a 24.4% sector-wide slide. Therefore, depressed mining stocks may not be the best income investment right now.
However, the same can’t be said about banking. With interest rates on the rise, lending institutions have seen net interest margins expand. After all, they’re now charging significantly more for loans, with issuing costs growing at a slower pace.
This comes paired with a higher risk of default for overleveraged borrowers. But it’s enabled earnings to accelerate. As a result, banking dividends are up by 60.6%, with HSBC Holdings currently in first place across the UK stock market!
Meanwhile, the travel sector is also reporting similar levels of income growth as it continues to recover from the aftermath of the 2020 pandemic. Industrials have boosted payouts by 14%, while the telecommunications industry grew dividends by 23%.
The bottom line
Banking, travel, industrials, and telecommunications seem to be where the opportunities lie right now. And while not every enterprise from these sectors may be worthy of investment, these sectors are where I’d begin hunting down new passive income opportunities for my portfolio in 2023.
