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2015 set to see strongest dividend growth since 2012

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UK dividends got off to a strong start in 2015, despite apparently poor headline figures masking accelerating underlying growth, according to the latest UK Dividend Monitor from Capita Asset Services.

Headline dividends in the first quarter of 2015 totalled GBP14.75bn, down 52 per cent. At the underlying level, which strips out special dividends, the total reached GBP14.49bn, down 0.3 per cent year on year.

The decline is down to two factors. Firstly, Vodafone paid its world record GBP15.9bn special dividend in Q1 2014, distorting year on year comparisons at a headline level.  Equally, the reduction in size of Vodafone since the disposal of Verizon has reduced the total the company paid out in Q1 2015 by GBP840m. Additionally, Barclays delayed the payment of its final dividend by five days, shifting GBP630m of Q1 dividends into Q2. At almost GBP1.5bn, the combined effect of these two payments is over a tenth of the first quarter total.
 
Adjusting for these factors, the figures are much more positive for investors with the latest quarter seeing the fastest growth rate in almost three years, up 10.4 per cent year on year before special dividends.
 
Dollar strength has played a role. By the end of Q1, the dollar had risen by 12 per cent against the pound, compared to a year earlier. With 53 companies in the FTSE 350 reporting in dollars, and denominating their dividends in that currency (paying a total GBP33.8bn in dividends in 2014), the exchange rate effect is a significant one for investors to consider, and will boost 2015 payouts, with Shell a notable beneficiary in Q1.
 
On a sector level, growth in the first quarter was broad-based. The oil sector saw dividend payouts increased by 16 per cent, principally due to positive currency effects, and to a much lesser extent due to Shell and BP increasing their dividend payout in dollar terms.
 
Mining and chemicals did well, with double digit growth rates, but domestically orientated sectors had a more consistently strong performance. Construction, general retailers, household goods, media, telecoms (fixed line), property, and technology sectors all posted double digit growth. Healthcare and utilities dividends underperformed.
 
Mid caps comfortably outpaced their large cap counterparts over the full year last year, growing 7.5 per cent on an underlying basis compared to just 0.7 per cent from the big caps. Their growth rate is accelerating too. In the third quarter dividends rose 15.5 per cent, in the fourth 18.6 per cent, and 20.9 per cent in the first quarter of 2015 on an underlying basis. While this breakneck pace of growth is likely to prove difficult to sustain, it reflects the greater exposure of the mid caps to the rapidly growing UK economy.
 
As a result of strength in the FTSE 250, faster than expected underlying growth in Q1, and return of Lloyds Bank’s dividend (Lloyds will distribute GBP600m in May, its first payout since 2008), the outlook for income investment in 2015 is brightening further. Capita has increased its 2015 forecast for headline dividends to GBP86.5bn, up from GBP86.1bn. On an underlying basis, Capita has revised its forecast up by GBP500m, with dividends forecast to reach GBP84.1bn. If this total is achieved, the rate of growth for 2015 of 6.4 per cent will be the highest since 2012.
 
The prospective 12 month yield on the UK market has risen to 4.1 per cent on the back of the strong dividend growth. In contrast, the yields on bonds, cash and property have all declined, each by 0.1 percentage points, making the comparison with equity investment even more attractive. By way of comparison, yields on government bonds stood at 1.5 per cent.
 
Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services, says: “2015 is off to a flying start for income investors, boding well for the full year. At last we will see strong growth this year, after a disappointing couple of years for dividend growth. Yes, the quarter pales in comparison to a year ago at a headline level, when Vodafone paid a world record dividend following its Verizon stake sale. But under the surface, things are clearly picking up pace. At one end of the FTSE, mid cap domestically orientated companies, most sensitive to the UK’s economic growth, are able to increase the returns they are offering shareholders at a dramatic rate. At the other, dollar strength is helping buoy payouts from the UK’s most internationally exposed firms – a stark contrast to last year. And equities have extended their lead over other asset classes in their ability to provide such a good income.  
 
“Challenges remain, not least in the supermarket sector, where the payouts are vulnerable. Shareholders are bearing the cost of the sector’s price war. Tesco’s cuts could cost investors up to GBP1bn. But the reinstatement of Lloyds Bank’s dividend will give investors optimism, marking a milestone for the recovery of the market.” 

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