Interactive Investor

UK dividends set to beat 2012 levels with prospective yield up to 4.1%

20th April 2015 12:25

Rebecca Jones from interactive investor

Despite poor headline figures which show that UK dividends were down 52% in the first quarter of 2015 compared to the same period last year, Capita has revised up its forecast for full-year dividends by 6.4%.

Headline UK dividends totalled £14.75 billion in the first quarter of 2015, down from £30.7 billion in the first quarter of 2014, while underlying dividends (which exclude special or one-off payments) totalled £14.49 billion, down 0.3% year-on-year.

The firm claims that the decline is due to three factors: the world-record £15.9 billion special dividend paid by Vodafone in the first quarter of last year, which impacts the headline figure; the reduction in size of the group following the disposal of Verizon; and Barclays' delay on its final dividend, which has pushed payment into the second quarter.

Flying start

According to Capita, the combined effect of the above factors totals £1.5 billion, or over a tenth of the first-quarter total. Adjusting for these factors, Capita claims that the figures are far more positive, with the first quarter in fact seeing the fastest growth in dividends in almost three years, up 10.4% year-on-year before special dividends.

Justin Cooper, chief executive of shareholder solutions, part of Capita Asset Services, comments: "2015 is off to a flying start for income investors, boding well for the full year. At last we will see strong growth this year, after a disappointing couple of years for dividend growth.

"Yes, the quarter pales in comparison to a year ago at a headline level, when Vodafone paid a world record dividend following its Verizon stake sale. But under the surface, things are clearly picking up pace."

Dollar strength

The strength of the US dollar has played a key role in growth, with the greenback up 12% against sterling compared to this time last year.

With 53 companies in the FTSE 350 reporting in US dollars, and denominating their dividends in that currency (paying a total £33.8 billion in dividends in 2014), Capita claims that the exchange rate effect is a significant one for investors to consider, and should boost 2015 payouts.

The oil sector also played a key role in dividend growth as dividend payouts increased by 16% in the first three months of the year. This was principally due to positive currency effects and, to a lesser extent, to Shell and BP increasing their dividend payouts.

Medium-sized companies also contributed heavily to growth with dividends from this section of the UK market growing 7.5% on an underlying basis in 2014 compared to just 0.7% from the large companies.

Mid-cap dividends

Capita reports that dividend growth among medium-sized companies is also accelerating. In the third quarter of 2014, mid-cap dividends rose 15.5%, 18.6% in the fourth quarter and 20.9% last quarter on an underlying basis.

As a result of strength in the FTSE 250, faster-than-expected underlying growth in the first quarter and return of Lloyds Bank's dividend (Lloyds will distribute £600 million in May, its first payout since 2008) Capita has increased its 2015 forecast for headline dividends to £86.5 billion, up from £86.1 billion.

On an underlying basis, Capita has revised its forecast up by £500 million, with dividends forecast to reach £84.1 billion. If this total is achieved, the rate of growth for 2015 of 6.4% will be the highest since 2012.

Capita claims that the prospective 12-month yield on the UK market has risen to 4.1% on the back of strong dividend growth. In contrast, the yields on bonds, cash and property have all declined, each by 0.1%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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