Payouts are only growing thanks to currency movements and special dividends
Thursday 17 Oct 2019 Author: Tom Sieber

Dividends from UK stocks may not be as reliable as investors have come to believe.

The latest Dividend Monitor report from Link Asset Services shows that while dividends rose 6.9% on a headline basis to £35.5bn in the third quarter, growth was entirely driven by one-off factors and currency movements rather than healthy gains in corporate cash generation.

The growth came from some ‘exceptionally large’ special dividends and gains from a fall in the value of the pound as dollar and euro-denominated dividends enjoyed a higher relative value.

On an underlying basis the picture is far less healthy. Dividends were down 0.2% excluding special dividends and, once you strip out currency gains, dividends were almost 3% lower. This represents the worst quarterly performance in three years.

And while the full year is expected to show headline growth of more than 10%, this again reflects a combination of bumper special dividends and sterling weakness.

While the media and airline sectors delivered strong year-on-year growth in the quarter, the retail sector and telecoms space both saw big slumps with high profile dividend cuts at the likes of Vodafone (VOD), Marks & Spencer (MKS) and Dixons Carphone (DC.).

One compensation for investors is the high yield offered by UK stocks; Link puts this at 4.4% which is close to historic highs. Just as with an individual company, an unusually high dividend yield from the broader market can be a warning signal that payouts are unsustainable at their current level.

Link Asset Services also notes the level of dividend cover – the extent dividends are covered by earnings – for UK stocks is among the lowest globally at just 1.6-times. As a rule of thumb any ratio below 1.5-times is typically seen as a sign the dividend could be under threat.

The table displaying the FTSE 350 stocks with the lowest dividend cover suggests the dividends paid by asset managers Standard Life Aberdeen (SLA) and St James’s Place (STJ) could be vulnerable to a cut. Despite the company already reducing its dividend, Vodafone’s payout also remains in the danger zone.

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