Rising earnings, better-than-expected special dividend payments and a slump in the pound during the second half of last year – providing a boost to dividends declared in US dollars – were behind the increase. British American Tobacco (BATS) was the single biggest contributor to UK dividend growth, making a total payout of £4.4bn – accounting for a fifth of the increase in dividends.
On a sectoral basis, it was the miners that provided the biggest uplift, with payouts jumping by two-thirds to £11bn. After halving their payments in 2016 following 2015’s commodities pricing downturn, miners doubled dividends in 2017 and boosted them by two-thirds last year. Rising commodity prices provided an uplift during the first half, while a pullback in costly and risky exploration and project developments has also given more companies more capital to distribute to shareholders.
Can that momentum continue? Perhaps investors may have to temper their expectations this year. Falling share prices – amid rising Brexit uncertainty, ongoing trade wars and fears of a prolonged slowdown in global economic growth – have driven up prospective UK dividend yields to their highest level since the depths of the financial crisis in 2009, according to Link Asset Services. That is unsurprising, given the hefty contribution highly cyclical banking and mining groups make to overall dividend payments. Link expects the average dividend yield for UK stocks to rise to 4.8 per cent in 2019, against an average of 3.5 per cent during the past 30 years and a collective yield of 3.6 per cent in 2018.
Link chief executive Justin Cooper reckons this represents an "overly pessimistic view" of UK stocks’ income prospects. To bring the current yield into line with the long-run average, UK dividends would need to fall by more than a quarter, assuming share prices remained unchanged, he says. By comparison, the peak-to-trough decline in UK dividends during the financial crisis and subsequent recession was just under 15 per cent – below the 25 per cent cut priced in by markets at present, he adds. Mr Cooper reckons the rise in yields more likely reflects an undervaluation in UK stocks. “No one is touching British assets,” he says.
In any case, the high commodities exposure within the FTSE 100 makes UK dividend growth rates naturally volatile, particularly since many companies switched from progressive policies to paying out a ratio of profits. What’s more, dividend payments for some of the highest payers were boosted via asset disposals as some miners sought to rationalise their portfolios. That included BHP’s (BHP) $10.8bn sale of its underperforming US shale assets to BP (BP.) and Rio Tinto's (RIO) £1.7bn disposal of its 82 per cent interest in the Hail creek coal mine to Glencore (GLEN).
