DIVIDENDS
B
efore the nancial crisis,
investors in search of income
knew that certain sectors
could be relied upon to deliver
generous dividends and
market-beating yields. Banks were always
at, or near, the top of the list; food retailers
and utilities were good bets, too, as were
the big pharmaceutical companies and oil
and gas majors.
Today, the picture is quite di erent.Most
banks struggled to survive the nancial crisis
and, although HSBC still o ers a reasonable
yield, the sector as a whole has little appeal
for the income investor.
As for the food retailers, 2014 was their
annus horribilis
.Tesco is forecast to pay a
dividend of around 4.6p for the 12 months to
February, a third of the 14.76p it paid out at
the same time in 2014.Analysts do not expect
a recovery any time soon, with the dividend for
2015 expected to be just 5.3p
1
.Tesco delivered
the most headlines last year but Morrisons was
not far behind, and Sainsbury’s also signalled
that dividends will be lower in the future.
‘UK supermarkets are su ering from
structural changes in the market, and it will
take a long time for them to re-engineer their
business models,’ says Justin Cooper, head of
shareholder solutions at CapitaAsset Services.
The outlook is far from certain for other
erstwhile income sectors, too. Utilities have
become political footballs and their fate will
not be known until after the general election.
Oil and gas majors BP and Royal Dutch Shell
have traditionally been among the highest
As the traditional sectors for providing generous
dividends face tough conditions, investors are looking
elsewhere for their market-beating yields
By Joanne Hart
20
|
THE INVESTOR
SECTOR WATCH
Housebuilders
and telecoms
are the stocks
of choice, with
oil and food
retail groups
faltering
dividend payers in the market, but last year
they were hit by rising costs and a strong pound
in the rst half, followed by falling oil prices
in the second. If lower oil prices continue,
dividends are almost certain to be a ected.
And yet the future is not all bleak. Capita
predicts that underlying dividends in the UK
will rise 5.5% to £83.7 billion this year, having
increased by less than 2% last year.
Over the long term, too, dividends have
been growing steadily, as Chris Reid of Majedie,
manager of the St. James’s Place UK Income
fund, points out.‘Income from the FTSEAll-
Share has increased by an average of 7% per
annum over the past 10 years.We have some
fantastic income providers in the UK,’ he says.
Dividend growth across the market is
clearly a positive trend, but deeper analysis
provides further clues about where best to
look for income, not just now but in the future.
FTSE 250 dividends are increasing signi cantly
faster than those in the FTSE 100, albeit from a
lower base. In the third quarter of last year, for
example, the main index accounted for almost
89% of total pay-outs, but dividends fell 1.1%
year-on-year.The FTSE 250 accounts for just
over 9% of total pay-outs, but dividends within
the index rose 7.6%.
‘The FTSE 100 is unusual because so many
companies report in dollars or euros and
derive pro ts from overseas,’ says Cooper.
‘So when the pound is strong, dividends
su er, particularly if they are declared in
dollars and then converted to sterling. Equally,
these companies are more sensitive to global
economic turbulence.Mid-cap stocks are
more domestically oriented, and tend to be
more cyclical, so they do better when the UK
economy is recovering.’
Housebuilders are an example of this trend.
Not only have they recovered dramatically
from their post-crisis lows, but they are also
determined to adopt a more disciplined
approach to capital – and that means returning
more money to shareholders through
dividends rather than investing in overpriced
land. In other words, they are making sure that
the amount they pay out in dividends is well
covered by earnings. Dividend cover, calculated
by dividing earnings per share by dividends per
share, is a key measure for income investors;
