There’s no denying it: with other asset classes now offering yields not seen since the financial crisis, the pressure is on blue-chip equity dividends to deliver. Yet UK large caps can, in the main, still lay claim to at least some of the attributes that help make equities the best tool for compounding wealth over the long term. Many are offering chunky payout rates of their own, and they aren’t necessarily the dividend traps that such yields might imply.
The UK equity market may be struggling to shake off an unwanted reputation internationally, but in certain ways that’s a help not a hindrance for those seeking income. It’s left some reliable dividend payers trading on inflation-beating yields, and in many cases there isn’t excessive cause for concern, operationally speaking.
Factor in those companies that offer the potential for good dividend growth, and the attractions of the domestic market for income investors should be obvious.
The most recent Computershare Dividend Monitor underlines the relative resilience of payouts across the UK market. A second-quarter update saw Computershare analysts acknowledge that the fourth quarter of 2023 looked “likely to be markedly stronger” than first thought, arguably in keeping with the overall resilience of the domestic economy seen in recent months. Underlying dividend growth is now expected to amount to 6.1 per cent for the full year, meaning a regular payout total of £88.9bn. That’s still a way shy of the pre-pandemic heights of close to £100bn, but it will represent the third consecutive year of strong growth.
There are reasons to be wary. Not every company will be able to meet the demands of a high payout ratio in the years ahead. While capital growth is an invaluable part of the total return equation for all investors, certain blue chips’ attempts to reinvigorate their operations and kickstart share price performance will mean more internal competition for resources in future. Greater amounts dedicated to the likes of capital spending and research and development costs should stand a business in good stead, but in the short term they can put pressure on dividends.
All of which is to say that stock selection remains vital: we have analysed the prospects of a selection of the UK’s biggest dividend payers in absolute terms. As with our last edition in 2021, we focus on the forward-looking investment case for income investors, spanning the major income-paying sectors of the UK market. DJ
