Dividends have a bumper quarter, but can the good times continue?

Investors are celebrating after companies paid out a bumper £37bn in dividends during the second quarter of the year – almost 39% more than the same period last year*.

The Link Group’s latest UK Dividend Monitor revealed underlying pay-outs rose 27% year-on-year to £32bn, with the total then boosted by some large, one-off payments. While most sectors benefited from solid profitability and return to normal after Covid-19, the mining, banking, and oil sectors enjoyed the best increases.

Here we explain the importance of dividends, look at the outlook for full-year pay-outs, and highlight some investment funds that focus on them.

What are dividends?

Dividends are sums of money paid regularly – often annually – to shareholders by a company out of its profits or reserves. They are seen as a way to reward long-term investors for the risk premium they are taking on by holding a company’s equity.

The level of these rewards is decided by the company’s board of directors and approved by shareholders through their voting rights. Companies paying regular dividends are more likely to attract investors. This creates demand for their stock and helps bolster the share price.

Special dividends

These are one-off, non-recurring dividends that are usually linked to a certain event – or when a company has excess cash – such as the sale of a business or asset.

According to the Link Group, special dividends reached £5bn during the second quarter, with pay-outs from financial firms being the most generous. Aviva was the largest payer. It is returning £3.75bn of surplus capital to shareholders, of which three quarters was distributed as a special dividend. The rest will take place as part of a share buyback. Another £1.1bn came from mining companies Rio Tinto and Anglo American, which had benefited from high commodity prices.

Top company payers

The total pay-outs by the top five companies on the list combined was £13.8bn – 77% of the overall amounts paid to investors, according to the Link Group’s calculations. Mining company Rio Tinto was the most generous annual dividend payer, followed by Aviva and HSBC. Anglo American and Shell came next.

Pay-outs by the 100 largest companies appeared to grow significantly faster than mid-caps in the second quarter, with the rebound in bank dividends an especially large contributor. “The flattering effect of the strong pound is also most strongly felt among the UK’s roster of big multinationals,” noted the report.

Outlook

So, how is the rest of the year expected to play out from a dividend perspective? Well, the first point is that mining dividends may have now peaked, according to the Link Group’s forecasts. There are also likely to be negative factors to consider over the coming months, with headwinds expected to strengthen as we head into 2023.

“This will be most obvious in the mining sector based on current trends, but an economic recession will crimp the ability and willingness of many companies to grow dividends,” it stated. However, it’s still a pretty positive picture. “We now expect headline dividends for the full year of £96.3bn, up 2.4% year-on-year,” it added.

Funds to consider

Considering the importance of dividends, it’s unsurprising that many fund managers will pay close attention to them when putting their portfolios together. And investors don’t just have to stick to the UK stock market – dividends are paid by companies all over the world.

Here we highlight three funds:

Matthews Asia ex-Japan Dividend 

This fund seeks a total return by investing in companies exhibiting attractive dividend yields and/or the potential to grow dividends over time. As far as market cap exposure is concerned, mega caps account for a 36.4% share, followed by 28% in small caps, 26.1% in mid-caps, and 7% in large caps**. Currently, the largest positions in the portfolio are Tencent Holdings, Taiwan Semiconductor Manufacturing, and E Ink Holdings**.

According to the fund’s latest commentary, the overall global growth outlook remains murky with risks of protracted inflation and tight global liquidity amid weak economic growth. However, wage inflation in most Asian countries remains quite moderate and commodity cost pressure has started to soften. “In this environment, the fund’s focus remains steadfast: looking for businesses with a strong ability to fend off inflation cost pressures and maintain their earnings and dividend growth outlook,” it stated.

BlackRock Continental European Income 

This is a core European income fund that invests mostly in continental European large- and mid-cap securities. That translates into an investment universe of approximately 300 to 350 stocks that are researched in detail. The manager’s active investment skills have been the key to this fund delivering reliable, growing income without sacrificing long-term capital appreciation.

The team does not simply search for the highest yielding stocks but rather seeks to identify undervalued stocks in the high yield and/or quality space that offer sustainable dividends, potential dividend growth and inflation protection. These types of companies have historically provided investors with strong returns and a growing income stream over time. The largest country weightings in the fund are currently 22.6% in France, 20.9% in Switzerland, 15% in Denmark, 9.2% in Sweden and 8% in Germany**.

M&G Global Dividend 

This fund’s objectives are to increase the income stream every year and provide a dividend yield above that available from the MSCI All Country World Index over any five-year period. Stuart Rhodes, the fund’s manager, focuses on companies with the potential to grow their dividends over the long term and invests across a wide range of countries, sectors, and company sizes.

Stocks are selected with different sources of dividend growth to build a fund that has the potential to cope in a variety of market conditions. In recent weeks, stocks that aren’t that sensitive to economic downturns dominated the list of positive contributors, according to the most recent fund commentary and Stuart has also taken advantage of the continued weakness in technology to increase exposure. “We bought more Microsoft in quality tech and added to our semiconductor holdings Broadcom, ASML, Analog Devices and KLA Corp,” it added.

*Source: Link dividend monitor, Q2 2022
**Source: fund factsheet, 30 June 2022

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the fund managers and do not constitute financial advice.