But yield is a function of the market, so it’s unsurprising to see that share prices for the former grouping have declined by an average of 23.6 per cent over the past 12 months. As things stand, the yield on UK equities is well in advance of its long-term average, possibly implying that shares remain undervalued, both in terms of overseas markets and other asset classes.
We live in interesting times. And with no resolution to the Brexit impasse likely until the end of October, external concerns will continue to keep a lid on sterling. If, by some miracle, agreement on a trade deal is reached prior to then, it’s probable that sterling would retrace against the dollar. This would effectively reduce distributions, as many of the biggest payers in the index denominate their accounts in US currency. When the pound slides against the dollar, it’s generally good for income seekers focused on the FTSE 100, as companies trading on the UK benchmark have a much greater proportion of revenue generated from abroad. Foreign exchange translations increased the first-quarter dividend growth rate by £613m, or 3.7 percentage points, with the benefit particularly noticeable in the oil & gas and pharmaceutical sectors, which provided four out of the top five payers during the period.
Chief among them, Royal Dutch Shell (RDSB) – which remains in a giving mood – recently outlined plans to increase spending and dividends after 2020. The energy giant intends to invest $30bn a year between 2021 and 2025, up from a prior range of $25bn-$30bn. It also anticipates that free cash flow will rise to around $35bn by 2025, assuming a Brent crude price of $60 a barrel. This is up from the $28bn-$33bn it forecast for 2020. The extra cash would enable the group to distribute at least $125bn to shareholders through dividends and share buybacks in the years to 2025.
Shell hasn’t been the only top-tier resource constituent loosening the purse strings. BHP (BHP) has returned £1.7bn to shareholders via a special dividend funded by the proceeds of the disposal of its US shale oil interests.
With interest rates in the doldrums, the UK’s income stocks have provided a bulwark for investors. So what are we to make of recent analysis from Henderson International Income Trust (HINT) suggesting that half of the 163 highest-yielding non-financial companies within the Janus Henderson Global Dividend Index are potential dividend traps?
Ben Lofthouse, fund manager at the trust, said that investors with exposure to these stocks – typically with yields “too good to be true” compared with the wider market – can find themselves in a situation where “the income [they] hoped for is cut or has no prospect of sustainable growth”, thereby eliminating a key advantage of investing in equities, which is for dividends to grow over time. As Mr Lofthouse explains, a steadily rising payout not only mitigates against inflation, but “crucially it also drives share prices higher over the long term, meaning investors can benefit from capital gains too”.
The analysts at Henderson highlight that dividend traps typically have low dividend cover, paying out a high proportion of profits as dividends. The average dividend cover for the dividend traps is a multiple of 1.4 against a non-trap average of 2.2. Likewise, net debt as a proportion of cash profits comes in at 3.0 times and 1.3 times, respectively. Henderson also notes that dividend traps grow their free cash flow at a much lower rate than non-traps.
