2019 proved to be yet another spectacular year for British dividend investors. Total payouts from ‘UK plc’ hit new record highs of £110.5bn, according to Link Group’s latest Dividend Monitor Report. This represents a huge 10.7% year-on-year rise.
So what did this mean in the real world? For every £20 that share pickers ploughed into the stock market, they got back on average £1.02 in dividends. An impressive return, I’m sure you’d agree. But dig a little deeper and the result isn’t quite as encouraging as it first looks.
On an underlying basis — in other words stripping out the contribution of special dividends — total payments rose by a far more muted 2.8%, to £98.5bn. This was the slowest rate of growth since 2014, Link says.
And when you look at underlying growth without currency effects, things get even worse. According to Link Group, dividends rose just 0.8%, the worst rate of growth for three years.
Dividends to fall in 2020?
A rise is still a rise though. And those record levels and special dividends still made plenty of share pickers wealthy. But Link Group says that the pickings won’t be as rich in 2020.
The financial services giant says that headline dividends will fall 7.1% this year to £102.7bn. Underlying rewards will fall 0.7% year on year to £97.9bn, it predicts, while at constant currencies they will rise 1.1%.
Around 40% of UK dividends are paid out in US dollars, Link Group says, and so the huge weakness in the pound last year helped to lift sterling rewards significantly. The domestic currency has recovered more recently, and this overshadows dividend expectations in this year.
Meanwhile Link expects the number of special dividends to fall from the £12bn posted in 2019. This was the second biggest amount on record and the total is predicted to fall back to more “normal” levels.
Stick with stocks!
It sounds like I’m lukewarm on stocks therefore, but not a bit of it! None of the above means investors should be prepared for paltry returns. For 2020, the FTSE 100 averages a whopping 4.2% yield, while the mid-cap space carries a forward figure of 3%. Compare that with the sub-1.5% interest rates that Cash ISAs continue to offer.
Investors would also be better buying stocks than putting their money to work with buy-to-let too. Talk of bulging rents might be all over the news right now but it’s not for me. Aside from the huge upfront costs that come with the purchase of property, landlords also face a galaxy of rising costs on top of the headache of mounting regulation.
And the less said about Bitcoin as a better asset class than stocks, the better. It might have got off to a flyer in 2020, but prices remain far too volatile in my opinion. Compare current prices of $8,750 versus the $13,000 at which Bitcoin was changing hands seven months ago. And big questions over the legitimacy of virtual currencies as long-term assets are still to be answered as we embark on a new decade. You’d do much better tapping into the big dividends that UK share have to offer, I reckon.