Dwindling dividends pose a threat to income
Investors expecting to receive dividend payouts are likely to be disappointed as larger companies have been slashing dividends – or even suspending them completely – in their efforts to repair balance sheets damaged by the economic downturn.
The share registration firm Capita predicted in August that average dividends would be down 13% in 2009 as a whole, compared with 2008.
The trend is bad news for investors looking forward to their dividend payouts, but it also means that UK equity income fund managers are faced with an increasingly concentrated choice of stocks from which to create their income portfolios.
Mike Horseman, managing director of IFA Cockburn Lucas, points out that almost 75% of the UK’s available dividend is currently supplied by just 20 stocks (see table below).
Indeed, the top three – Shell, BP and Vodafone – produce a third of all dividends between them.
Clearly, it’s a risky position for fund managers, especially as more cuts may well be in the pipeline. Neil Woodford, manager of Invesco Perpetual Income and Higher Income funds, believes that both BP and Shell may be forced to cut their payouts next year.
He points to the rising cost of finding new oil reserves and the likelihood that oil prices could fall in the current economic climate.
Horseman suggests that investors searching for an income should be looking instead at globally invested funds.
“There are many international companies with progressive dividend policies and dividend growth strategies – the MSCI World index offers 400 plus companies with dividends in excess of 4%, so global equity income managers have a much more diverse universe of stocks to select from,” he says.
He favours the Sarasin International Equity Income fund, paying a yield of around 4%, because it can hedge against currency movement risks that could reduce dividend values in sterling terms.
UK DIVIDEND CONCENTRATION
|Stock||As a percentage of total dividend
|British American Tobacco||3.4%|
|Scottish & Souther Energy||1.1%|
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.