Summer 2019 Investment Masterclass

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Shareholders have enjoyed bumper dividend payouts, but it’s not all plain sailing.

The value of regular dividend payments has risen steadily since the financial crisis of 2008. Dividends paid out by UK-listed companies through to 2018 rose by 85%, with £19.7 billion paid out in the first three months of 2019 – a first quarter record according to Link Asset Services. In May, however, a number of high profile companies, including Vodaphone and Marks & Spencer, slashed their dividends by 40%, creating a less rosy picture.

Companies usually pay regular dividends twice a year, as one interim and one final payment. You don’t have to be a direct shareholder in individual companies to benefit – dividends are also paid to many pension and ISA funds. The impact on both institutional and individual shareholders means companies are reluctant to cut their dividends, even when it may make economic sense to do so.

The record figures this year have been attributed to several one-off ‘special’ dividends. For example, the global resources company BHP Group paid a huge £1.7 billion special dividend, following the sale of its US shale oil interests. But even excluding these, regular dividend payments still rose 5.5%, to £17.6bn, prior to the cuts in May.

Many of the largest companies listed on the UK stock market are global conglomerates. The low value of the pound has also helped boost profits, once overseas earnings are converted into sterling, and this has helped push up dividend payments.

Choosing carefully

Given the general history of consistent gains, it is not hard to see how dividends can help boost overall investment returns. Those looking for dividend payments might want to consider equity income funds. These aim to invest in companies that have a track record of growing their dividend payments.

Established oil giants, utilities, pharmaceutical, tobacco and financial companies have good track records for paying dividends, although there’s no guarantee these will continue. It’s worth noting that many banks stopped paying a dividend following the financial crash, although a number have now reinstated these payments. In contrast, smaller, fast-growing companies often pay low – or no – dividends, as surplus profits tend to be reinvested in the business.

Dividend reinvestment

Many investors choose to reinvest their dividend payments, to benefit from higher compound returns. This can significantly increase the value of holdings over longer periods of time.

For example, over the past 25 years (from January 1993, to March 2018) if you’d invested in the MSCI World Index, the capital growth would have produced a return of 323%, without dividends being reinvested. If these dividends had been reinvested, returns would stand at 640%.

Dividends can be a useful way for investors to earn an attractive income from their investments without having to dip into their capital. As so often in investment decisions the devil is in the detail, now more than ever, so sound advice is crucial.

 

The value of your investments, and the income from them, can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

 

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