October 29, 2024

Improved prospects for income investors

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British investors love their dividend payments, but the best payout growth of late hasn’t come from the FTSE 100, says Julian Hofmann in the Investors’ Chronicle. Data from Octopus Investments shows that total cash dividends paid by FTSE 100 companies are still almost 12% below 2019 levels (Covid triggered large cuts in UK dividends in 2020).

By contrast, ex-FTSE 100 firms are on course to pay out 9.2% more than pre-Covid levels. Aim is “the standout performer”, notching up an almost 45% payout rise. Income investors often perceive the FTSE 100 as more dependable than small caps, but the top-10 FTSE payers account for 56% of total dividends, leaving income reliant on the fortunes of a small cluster of firms.

Payouts are at least on a firmer footing than in the past, says Russ Mould of AJ Bell. Between 2014 and 2020, FTSE 100 earnings cover (profit divided by dividend payouts) “never once covered payouts by a factor of two or more”. Cover now stands at 2.07. FTSE 100 dividends are forecast to reach an aggregate £78.6 billion this year and £83.9 billion in 2025, still short of 2018’s record of £85.2 billion.

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FTSE 100 firms have also announced £49.9 billion in share buybacks this year, close to last year’s level. Globally, dividend payouts hit a record $606.1 billion in the second quarter, according to the Janus Henderson Global Dividend index. Banks have been enjoying “strong margins and limited credit impairments”, enabling them to pay generous dividends, says Jane Shoemake of Janus Henderson.

Tech firms and dividends

Meanwhile, technology firms are increasingly shifting from growth to income mode, with Meta, Alphabet and Alibaba the new kids on the dividend block. For income investors, that is “a really positive signal that will boost global dividend growth by 1.1% this year”.

This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

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