When it comes to dividends, UK equity income funds have been the holy grail for investors.
British companies are renowned for their dividend-paying culture, and the low yield environment has made this income stream particularly attractive.
But fresh research from asset management giant Janus Henderson puts the stability of British dividends into question. The report revealed that the UK was the only region in the world to see a year-on-year drop in dividend payments, sliding 3.5 per cent in the second quarter of this year. The last time the UK was the only region to see dividends fall was back in 2010.
By comparison, emerging markets had seen dividend growth swell by almost 30 per cent, and even the US had seen double-digit growth, increasing by 10 per cent.
Part of the UK’s slump was caused by the fall in the value of sterling, which meant that payments from UK firms were translated into US dollars at a less favourable exchange rate, masking the dividends paid out by companies. So if you strip out the impact of this, then growth actually sits closer to six per cent.
But perhaps the bigger worry here is that the top five dividend-paying companies in the UK accounted for around 38 per cent of total dividends paid in 2016, up from a third in the previous year. Just 15 companies account for a whopping 58 per cent of total dividends.
“There is a danger that we are relying on just a handful of companies to provide us with dividend income – especially as those companies tend to be in certain sectors such as banks, utilities and resources,” warns Juliet Schooling Latter, research director at FundCalibre.
Of course, it’s all fine when companies pay up, but what happens when times get tough?
According to figures from Capita, financials paid £8.6bn worth of dividends in the second quarter of 2008, but this more than halved the following year as the global financial crisis took hold and banks stopped payments altogether.
“Situations like this can have a devastating effect on an investor’s portfolio if they are reliant on those dividends as an income,” says Schooling Latter, pointing to figures from the Share Centre which indicate that the ability of FTSE 100 firms to pay their dividend is at its lowest level since 2009.
Another worrying factor is when companies are paying more in dividends than they are making in profit, or worse still, when they are using debt to pay their dividends.
Some high-profile names in the fund management industry have warned that dividend cover for some large cap firms has been getting tighter, prompting some companies to dip into the debt markets, which is unsustainable in the long run.
So with all this in mind, should investors increase their exposure to other regions around the world in order to get a reliable source of income? Well yes, if the figures from Janus Henderson are anything to go by.
The report shows the amount of dividends paid to investors on a global basis reached a quarterly record, rising to $448bn, with the US, Japan, Switzerland, Netherlands, Belgium, Indonesia and South Korea all posting record quarterly figures.
Europe, excluding the UK, scooped up the highest level of annual dividends throughout the year, hitting $150bn. And the US came in second place with $121bn.
Yet Schooling Latter warns that dividends in other countries can also be concentrated in a few sectors. For example, in Taiwan, a single company – Taiwan Semiconductor Manufacturing – accounts for a third of the country’s dividends. “That said, there are far more companies to choose from and, with corporate governance improving in a number of countries and dividends increasing, the outlook is positive.”
From a sector level, it was financial companies – particularly the banks – which stormed ahead of other industries, accounting for half the headline level of dividend growth. Technology, industrials and basic materials also saw strong returns over the quarter. And only telecom firms suffered a dip in growth, pulled down by dividend cuts at Telefonica and China Unicom.
So which companies were the best dividend payers in the second quarter of this year? Here’s the top 10 according to Janus Henderson:
Top dividend payers
1. Nestle (Switzerland)
2. Zurich Insurance Group (Switzerland)
3. HSBC Holdings (UK)
4. Sanofi (France)
5. Allianz (Germany)
6. BNP Paribas (France)
7. National Grid Plc (UK)
8. Anheuser Bush/InBev (Belgium)
9. Daimler (Germany)
10. Commonwealth Bank of Australia (Australia)
If you don’t want to invest directly in stocks, then another option is to buy funds. Schooling Latter recommends the Artemis Global Income and Fidelity Global Dividend funds because they invest in dividend-paying companies all around the world.
Alternatively, if you want to stick to the UK, think about investing in the Rathbone Income a fund, which invests in all sizes of company and has raised its dividends in 23 of the past 24 years. Or you could consider an investment trust like City of London, which has increased its dividend payment every year for the past 50 years.
Investors shouldn’t necessarily run scared and ditch UK income funds altogether – but it’s definitely worth eyeing up other regions around the world in case UK payouts start a downward spiral.