Dwindling dividends pose a threat to income

23 October 2009

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. 


Stock As a percentage of total dividend
(2009 forecast)
Shell 12.6%
BP 12.6%
Vodafone Group 7.5%
HSBC 6.5%
GlaxoSmithKline 5.6%
AstraZeneca 3.8%
Unilever 3.7%
British American Tobacco 3.4%
BHP Biliton 2.5%
Tesco 1.8%
National Grid 1.7%
Aviva 1.6%
Diageo 1.6%
Rio Tinto 1.5%
Standard Chartered 1.4%
Imperial Tobacco 1.4%
Reckitt Benckiser 1.2%
Centrica 1.1%
Scottish & Souther Energy 1.1%
Sabmiler 1.1%
Total 73.5%


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