As the debate rages about the impact of the falling pound on the UK economy, there’s little dispute about its effect on dividends. So far it has been wholly positive. In fact, it has triggered a dividend bonanza.
Take your share
Sterling’s precipitous plunge since the Brexit referendum on 23 June has sent UK dividends soaring, adding a massive £2.5bn to company payouts in the third quarter alone, according to the latest Dividend Monitor from Capita Asset Services. Better still, there’s more to come in Q4.
Capita predicts that 2016 will be a bumper year for dividends, which are set to rise a forecast 6.6% year-on-year to £84.7bn, owing to a combination of foreign exchange gains and the rising number of special payouts. That’s a huge amount of money and anybody can take a share, by investing in UK dividend stocks.
High and rising
Justin Cooper, chief executive of Shareholder solutions, part of Capita Asset Services, says UK investors have banked huge windfalls as the pound’s fall supercharges UK dividends: “We estimate that Q4 will see another currency windfall of almost £1.7bn.”
The average easy access account pays just 0.43%, according to MoneyFacts, and continues to fall. The FTSE 100, by contrast, now yields a far juicier 3.69%. Dividends aren’t just higher, they’re also rising.
The 20% devaluation of the pound since Brexit made the biggest contribution to the dividend surge, as dollar- and euro-denominated earnings from multinationals such as Royal Dutch Shell, HSBC Holdings and Marmite-maker Unilever were converted to sterling at far more favourable exchange rates. It made for the largest FX rate effect in any quarter since the financial crisis when the pound plunged from over $2 in 2008 to $1.38 in 2009. Healthy special dividends and a final payment from SAB Miller, which was paid just before the brewer’s delayed acquisition by Ab InBev, further boosted the total.
Mining cuts
It wasn’t all good news. Although mining stocks have been booming this year, last year’s annus horribilis forced many to cut their dividends or dump them altogether. However, Q3’s currency gains more than offset the effects of £2.2bn of cuts, keeping the index as a whole buoyant.
For anybody seeking income, dividends are the only game in town. Although dividend payouts aren’t guaranteed, over the long run most companies aim to increase them year after year, allowing you to lock into a rising income stream. If you reinvest those dividends back into the stock for long-term growth, this will generate around two thirds of your long-term investment returns.
Middle ground
Capita’s research suggests that investors should look beyond the FTSE 100 as mid-cap FTSE 250 stocks continue to outperform. They rose 4.9% to £2.7bn in the quarter, compared to just 0.9% growth from the top 100. Medium-sized companies tend to grow faster than the blue-chip behemoths, supporting faster dividend growth. They have also avoided headwinds such as weak commodity and oil prices, banking sector uncertainty and supermarket price wars.
The future could be more volatile, especially if company profits are squeezed by Brexit uncertainty, rising pension deficits and global economic uncertainty. Capita forecasts the prospective yield on UK equities will dip slightly to 3.6% but even if they do, they will continue to thrash the income on rival asset classes, such as bonds and cash.
The great dividend bonanza is set to continue – and you can join in!