Great News: Dividends Have Hit A Record High!

Investors have endured a tough 12 months, but don’t be misled by short-term volatility. Holding stocks and shares is still a financially rewarding thing to do.

The FTSE 100 may be 13.5% lower than it was one year ago, but that’s only a paper loss, unless you plan to sell your holdings today. If you can drag your eyes away from today’s crashing indices you’ll see the long-term charm of investing lies elsewhere.

Capita sum

2015 is thought of as a tough year for stock markets but new research from Capita shows that underlying dividends hit a record high of £84.6bn, after rising an impressive 6.8%. Tens of billions have been dished out to shareholders for doing nothing apart from holding company stocks.

True, UK companies paid out 10% more in 2014 than they did in 2015, but that figure was distorted by the massive one-off special dividend from Vodafone, funded from the sale of Verizon Wireless. 2015 can hold its head up high. Most serious investors know that dividends produce around 40% of their total stock market returns, provided you reinvest them for growth, and Capita’s figures shows why they are so highly prized.

Income Casualties

Many will be surprised by last year’s strong growth, given the spike in high-profile dividend casualties, with Centrica, Standard Chartered, Tesco, Sainsbury’s, Anglo American and Glencore among those dumping their dividends. But that just confirms just how resilient dividends are. Companies are loathe to cut them if they can avoid it, witness how Anglo American held the line until the last minute, while BP and Royal Dutch Shell are doing all they can to keep the income flowing.

Dividends also help investors benefit from business growth and wider economic trends, such as last year’s 7.7% dollar surge against sterling. Two fifths of UK dividends by value are denominated in US dollars, Capita says, rewarding investors with £2.5bn in currency gains in 2015.

UK-focused companies delivered the strongest dividend growth, notably clothing retailer NEXT and housebuilders such as Barratt Developments, while the financial sector also grew payouts strongly. the FTSE 250 jumped an impressive 22.6% to £10.2bn, the fastest growth since 2011. The FTSE 100 posted 5.5% growth to £73.9bn.

Trouble Ahead?

Capita warns that 2016 will be tougher. Recent commodity sector cuts will start feeding through to the figures, as will cuts by smaller oil producers. The takeover of SAB Miller will remove £1.3bn from the UK pot. Underlying dividends will fall 0.9% to £83.8bn, which is hardly surprising.

The FTSE 100 is forecast to yield 4% next year, which is pretty impressive given the ongoing meltdown. It’s even more tempting when you consider that interest rates are unlikely to rise this year, and may be cut instead. In a dark world, dividends are one of the true bright spots. 

One of the joys of dividend investing is that you tap into a rising income stream, which you can invest for long-term growth if you prefer.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Centrica and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.