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UK stocks to deliver “worst dividend growth” for five years. What should you do?

Fears over how slowing corporate earnings will whack dividend growth have been doing the rounds for ages. The recent outbreak of the coronavirus, and a subsequent raft of profit warnings, have also muddied the outlook for income chasers.

Data released today from Link Market Services has fanned concerns of weak dividend growth still further. According to chief operating officer Michael Kempe, “2020 looks likely to record the worst dividend growth rate in the last five years.”

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Are the UK’s biggest payers set to disappoint?

It adds that “a slew of lacklustre profit announcements from the UK’s biggest companies paints a dull picture for income investors.” Link notes that only half of the top 15 dividend payers in the UK have raised dividends in their latest financial announcements, with Vodafone and RBS cutting payouts while the rest chose to freeze them.

This cluster of companies are responsible for around 60% of all dividends distributed by London-quoted stocks, Link says. It adds that “if there is no significant growth from this group, it casts a long shadow over the rest of UK plc and reinforces [our] view that performance in 2020 will be less stellar than the previous year.”

Only BHP Group, Imperial Brands, and Rio Tinto (which raised its ordinary payout by 24% for 2019) raised the annual dividend by significant amounts, the financial services provider says.

Meanwhile, dividend hikes have been much, much more muted from Britain’s three biggest payers, Link says. Annual rewards from BP, Royal Dutch Shell, and HSBC – stocks which account for a quarter of the UK total – rose a modest 0.6% year on year at constant currencies. This was thanks to a small raise from BP.

It’s not just that income investors need to fear the impact of faltering profits performances, either. Around two-fifths of all UK dividends are declared in US dollars. So expectations of a stronger pound in 2020 means that payout levels will also suffer accounting for exchange rates.

Should you stick with stocks?

So how should we react to this news? Should existing owners of UK stocks sell their holdings and join prospective shareholders in seeking big returns elsewhere?

I’d suggest not. After all, recent weakness means the brilliant average yield on British stocks has marched even higher. According to Link Market Services the reading for the FTSE 100 now sits at a whopping 4.5%.

This is lower only than the average recorded at the start of 2019 and is equal to levels around the time of the 2008–09 global financial meltdown. Before that, you have to trudge all the way back to 1992 to find a higher yield, Link says. The environment remains favourable for UK share investors to make big money from dividend shares, then. And there is a wide selection of brilliant stocks that investors can choose from today.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Imperial Brands. 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.