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Dividends hit record highs but cover plummets! What should ISA investors do?

We all know what a great place UK plc is for investors to make big returns in. Earnings might be under pressure as key regions, from the US to China, Germany to Great Britain, experience some economic cooling. But for the time being, share pickers can still look forward to enjoying some big, big dividends from their investments, as recent data from Link Group shows.

What’s clear, however, is that stock pickers need to be a bit more careful when it comes to deciding what to buy with their hard-earned cash. And some fresh data from Henderson International Income Trust illustrates perfectly why.

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Profits and dividends to grow in 2019

The investment trust gave plenty to cheer on Monday morning when it predicted that, despite the growing stresses for the global economy, total profits across the world would rise to a fresh record of £2.4bn in 2019, up from £2.3bn last year.

The good news doesn’t end here either as expectations of more dividend growth naturally follow too. After topping the £1bn marker for the first time in 2018, total global dividends are predicted to hit £1.1bn in the current period, Henderson says. And this means payout growth will continue to outstrip profit growth (by 8.7% to 5.6% to be exact).

Ducking cover

It’s not all good news, however, and Henderson’s data shows some key things investors need to bear in mind.

Firstly, the freshest data suggests both earnings and dividends growth are set to decline in 2019 from that of recent years. Compare those numbers, say, with the annual rate of 6.3% at which profits were growing between 2010 and 2019, and growth of 10.3% for dividends in that period.

And secondly, Henderson’s expectation that dividend growth will continue beating profit expansion means payout coverage will keep slipping as well. Indeed, the latest study shows dividend cover sits at just 2.2 times for 2019, the lowest level for 10 years.

Moreover, the trend of deteriorating cover is particularly worrying for UK investors. While cover has fallen across every major region of the globe, an average figure of 1.6 times predicted earnings means London-quoted companies sit third from bottom of the list. For the record, a reading of (or above) 2 times is generally considered to be a safe level.

Be sensible

The data certainly gives us as investors fresh food for thought. As Ben Lofthouse, fund manager over at Henderson International Income Trust, comments: “Dividend yields are very attractive compared to prevailing interest rates, but investors need to tread carefully.” He adds that “dividends from approximately one fifth of the world’s companies… are potentially unsustainable, especially if the global economy weakens.”

Sound dividend investing is about more than chasing yield. There’s certainly plenty of pitfalls share pickers need to avoid. And a slowing global economy means we need to be particularly careful, especially so when it comes to considering companies with those carrying oodles of debt on the balance sheet.

That’s not to say investors need to pull up the drawbridge, of course. As Henderson’s data suggests, there’s still plenty of stocks out there that could make you a fortune with their big dividends.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.