Income falls in spite of dividend cheer

Income investors received a boost this week as some of the UK’s largest dividend-paying companies increased or maintained their payouts. But new figures show that private shareholders have seen their dividend income fall further than the market average so far this year.

In the past five days, Unilever, Imperial Tobacco and GlaxoSmithKline have all announced increased dividends, while BP and Royal Dutch Shell have confirmed that their shareholder payouts will be unchanged. However, while all five are among the top 15 UK dividend payers by market capitalisation, private investors have not held enough of them to prevent their income falling. Capita Registrars’ latest Dividend Monitor reveals that total payments received by private shareholders fell 10.5 per cent in the first quarter, year-on-year – but payouts to institutions and fund managers were down only 2.5 per cent.

A majority of companies, 106, increased or maintained their dividends in the first three months of the year, while only 56 cut or cancelled them. But big dividend cuts by oil companies and banks – including a £330m cut by Shell and a £670m cut by HSBC – dragged the total down. Shareholdings in these sectors and “falling share ownership” exacerbated the falls for private investors, the research suggests.

Private investors’ drop in income could have been greater, if the first-quarter figures had not been flattered by 10 per cent of companies bringing their payouts forward – to beat the introduction of the 50 per cent income tax rate on April 6. According to Capita, a total of £842m was paid early. Without this shift, first-quarter dividends would have fallen 7 per cent year-on-year across the market.

Earlier payouts will also affect the dividends paid in the next three months. “We should not expect a renewed dividend boom,” warns Capita. “The picture for the second quarter is muddied by the number of companies who paid early, by the changes [to quarterly payouts] at Unilever, and by Cadbury’s disappearance from the exchange. This will knock approximately £600m off what shareholders might hope to receive by the end of June.”

Analysts and brokers now recommend a focus on companies that can continue to improve their earnings. “The cyclical re-rating of equity markets appears to have run its course,” says Fredrik Nerbrand of HSBC Private Bank. “Going forward, we expect a normalised performance environment driven by fundamental earnings growth rather than further expansion in valuation multiples.”

Collins Stewart Wealth Management this week reviewed its screening of UK stocks to identify a new “dividend basket” for income investors. Its screening criteria include the number of times a company’s dividends are “covered” by earnings and cashflow, and a company’s ability to meet its short-term liabilities with its liquid assets, measured using the “quick ratio”: [cash + cash-like instruments + receivables]/[short term debt + payables]. “The higher the ratio, the less likely the stock will need to make sacrifices to remain solvent,” explains strategist Robert Jukes. Collins Stewart then filters out dividend-payers whose capital expenditure and changes in working capital are greater than 100 per cent of gross cash flow. When the screen was carried out last summer, five stocks were identified, but this week another 10 passed the test (see table).

One of these, BP, is also recommended by broker The Share Centre. “As the price of oil increases, its dividend is starting to look a lot more secure,” says investment adviser Nick Raynor. “It will therefore be more attractive for those searching for income.” His other selections are Aviva, Chesnara and Vodafone.

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