UK Dividend Monitor Q4 2018

24 January 2019 / Link Group

Justin Cooper, chief executive of Link Market Services -

"2018 was a terrific year for dividends but a terrible one for share prices. That’s pushed yields to extraordinary heights. A very high yield is often a sign of trouble ahead, as investors know that company earnings evaporate very quickly when the economy turns down."

  • 2018 dividends rose 5.1% to a headline record £99.8bn
  • Underlying dividends (which exclude specials) were 8.7% higher at £95.9b
  • Yield on UK shares hit highest level since March 2009 as share prices have fallen and dividends have grown
  • Top 100 set to yield 5%; mid-caps 3.3%; average 4.8%Link expects slightly slower growth in 2019 but still a record: underlying growth 5.3% to £101.1bn; 4.2% headline growth to £104.1bn

UK dividends reached a record £99.8bn in 2018, just missing the £100.0bn mark by a whisker, according to the latest UK Dividend Monitor, the UK’s most comprehensive study on dividends, from Link Asset Services. A combination of rising profits, slightly better-than-expected special dividends, and the slump in the pound in the second half of the year all contributed to a record annual dividend haul 5.1% higher in headline terms compared to 2017. The underlying total, which excludes special dividends, was 8.7% higher at £95.9bn.

The fourth quarter marks a seasonal low for dividends. Even so the total reached a record for the fourth quarter, rising 15.6% in headline terms to £17.3bn. Underlying dividends were 15.7% higher at £16.8bn. Excluding other one-offs, Q4 dividends rose by a tenth.

For the full year, a higher payout from the enlarged British American Tobacco made the single largest contribution to growth, but the mining sector collectively accounted for most of the increase. Banking dividends also did well, marked by the restoration of RBS’s payout after ten years, and Standard Chartered’s. Nine out of ten sectors raised payouts.

Plunging share prices in the fourth quarter combined with rising dividends to produce the highest yield for UK equities since March 2009, in the depths of the recession when they also hit 4.8%. Over the next year, shares will yield a collective 4.8%, based on our new forecast. The top 100 will yield 5.0%, and the mid-caps 3.3%. Before that, yields were last this high during the 1991 recession, according to The Barclays 2018 Equity Gilt Study. This time last year, by contrast, the collective UK equity yield was 3.6%.

To bring the current yield into line with the long-run average, UK dividends would need to fall by more than a quarter, assuming share prices remained unchanged. By comparison, the peak-to-trough decline in UK dividends during the financial crisis and subsequent recession was just under 15%.

UK equities are yielding substantially more than other asset classes. The 10-year gilt saw its yield drop back to 1.24% in Q4, owing to concerns over the global economy, while cash savings return 1.5% and property 2.8%.

For 2019, Link forecasts growth of 4.2% in headline terms, bringing a total of £104.1bn, comfortably a new record. Underlying growth (which excludes specials) is set to be 5.3% pushing UK payouts to a record total of £101.1bn. Based on the pound’s current exchange rate, this total includes a gain of £1.7bn, or 1.6 percentage points.

Justin Cooper, chief executive of Link Market Services -

"We still expect 2019 to break new dividend records, but our forecasts are not especially bullish - one or two companies face difficulties and the easy wins from the mining sector are behind us. Even so, a 4.8% yield implies an overly pessimistic view. The current disconnect between the level of dividends being paid and share prices doesn’t obviously mean share prices must rebound any time soon.

But if the world does sink into a recession in the next couple of years, or Brexit goes badly, the drop in dividends is likely to be in the 10-15% range, not the 25% or so currently implied by the market."

With grateful thanks to Exchange Data International for providing the raw data

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