Where next for dividends?

Crystal ball

Investors have been hit hard by dividend cuts over the past 18 months but two managers have revealed their secrets as they search for the elusive income.

Paras Anand, head of European equities and manager of F&C's European Growth and Income fund, urges investors to look outside of the UK for dividends.

He accepts that investors have traditionally looked to the UK stock market for income, where dividends are an ingrained part of equity culture. And until 2007 the UK has given a better dividend yield than Europe (FTSE All Share dividend yield compared with FTSE All World Developed Europe ex UK dividend yield).

However, he reveals that last year Europe delivered higher dividends for investors and is continuing to do so this year.

"Many European companies are increasingly re-assessing the importance of shareholder remuneration, including progressive dividend policies. This extends to companies across all sectors."

For example, the telecoms sector in the UK only contains five shares yielding more than 3.5%, whereas the European sector contains 14. In the financials sector, the UK has 33 stocks yielding above 3.5% while Europe has 46.

"Six companies account for 49% of dividends in the UK," says Anand. "Of these, I believe only two will grow their dividends in the future by a meaningful amount - HSBC and Diageo. So investors should look at a wider market for income and buy shares in Europe."

He names Deutsche Post as a company that has a strong yield (5.5%) with good prospects to both grow and deliver income.

Meanwhile, UK orientated income-producing investment vehicles have had to change their strategies to ensure they still produce a healthy level of income during the recession.

The City of London investment trust has cut its holdings from 102 to 89 to focus on companies with attractive yields and growth.

"Since January 2008, 23% of companies in the FTSE 350 have cut their dividends," City of London manager Job Curtis points out.

He agrees with Anand that Europe could be a good place to find income, and says he may increase his exposure to the continent from 5% to 15% over the next year.

However, Curtis believes the worst of the dividend cuts are over. "Going forward, FTSE dividends will hold. They will only grow very slowly."

He is also more confident than Anand about dividend prospects in the UK.

Curtis predicts that the majority of his 10 largest holdings will grow their dividends next year.

He says BP and Shell will hold their dividends while British American Tobacco, HSBC, GlaxoSmithKline, Vodafone, Diageo, Scottish & Southern Energy and Tesco will increase theirs.

"British American Tobacco will increase theirs by high single digits, while Glaxo will grow theirs by around 5% or 6%," Curtis adds.

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