UK dividends and 10 promising payouts from UK retailers

UK companies paid out £35.5 billion in dividends between July and September this year. With the total up by £2.3 billion versus 2018, it was a new record for third-quarter payouts. Even so, there are signs that after several fast-paced years, dividend growth is slowing down.

As ever when it comes to dividends, there are various moving parts that impact on what shareholders really feel in their wallets. At a headline level, dividend growth of 6.9 percent in the third quarter was still above the long-run average of 5 percent.

But what we’ve seen in recent months – according to stats from Link Asset Services – is a heavy skew caused by very large special dividends. When you strip all that away, payouts actually fell in those three months by 0.2 percent.

And even then, foreign exchange rates between the pound and the euro and the dollar flattered the numbers. The weak pound added around £850 million to the total. Strip that out and dividends fell by 3 percent in Q3.

Dividends in detail

Vodafone – once one of the UK’s most popular dividend stocks – has seen its business change a great deal in recent years. This year, a big cut to its dividend was a major drag on the overall FTSE 100 payout in the third quarter.

Vodafone slashed its dividend by nearly 40 percent to €0.09 for the year. Even then, the dividend cover was negative.

Source: Link Asset Services

In terms of sectors, banking dividends jumped by two-fifths between July and September, with Royal Bank of Scotland being a major contributor. RBS will have paid out a total of £3 billion in 2019.

Last year, the bank initiated dividends after a 10 year hiatus following the financial crisis. An interim and final payment totalling 5.5p was supplemented by a special of 7.5p, making 13p for the year. In this financial year, the bank has already committed to 14p, with an additional final payout due next spring.

Royal Bank of Scotland dividends since 2018

Elsewhere, mining dividends rose by almost a third, again thanks to special payouts from the two giants, Rio Tinto and BHP. Both companies have seen profits soar in recent years and are currently on forecast yields of 7.2 percent and 6.4 percent respectively.

That contrasts with the oil sector, where foreign exchange was the largest factor in dividend growth of 2.8 percent in Q3. Meanwhile, the media, leisure, and food retail sectors all saw double-digit underlying increases, but most sectors delivered single-digit growth, according to Link.

Hunting for high street payouts

Problems on the high street mean that retail stocks remain tricky territory for investors. Third quarter dividends fell by a fifth, with cuts from Marks amp; Spencer, Superdry, and Dixons Carphone. But more broadly, retail has seen some very mixed fortunes in the recent past.

The highest forward yields in the diversified retail sector are in stocks that have, unsurprisingly, largely seen their prices slump over the past year. Companies like Shoe Zone and Ted Baker have issued profit warnings, while Halfords is also now expected to cut its payout because of challenging trading conditions. So these yields could be dividend traps.

Yet, other retailers have managed to hold firm. In the current climate, where the outlook for shares may well depend on how Brexit is finally resolved, there is added uncertainty. But if equities do eventually bounce, cyclical, consumer-facing stocks could benefit – but there are no certainties.

This list looks for retailers with positive price performance against the market over the past year – so to varying degrees they enjoy investor support. Included in the table is the number of dividend increases over the past 10 years, dividend cover (all positive) and dividend growth forecasts, which vary a lot.

Motor retailers are regulars here, so to are stocks like Next, Dunelm and WH Smith, which have been solid dividend growth stocks in recent years.

A changing outlook for income hunters

Overall, the dividend picture for UK shares has been strong this year but the growth outlook is showing signs of weakening. UK shares are set to yield 4.4 percent (excluding any special dividends) over the next twelve months, according to Link, with the FTSE 100 yielding 4.5 percent and the mid-caps 3.3 percent. Expectations are that 2019 will see the headline dividend total rise by 10.4 percent to £110.3bn.

At Stockopedia, where we track a number guru-inspired income screens, we’ve seen a notable change in the performance of some of these strategies in 2019. Last year, dividend stocks, and especially those with a higher quality/ income flavour, failed to fly against momentum and growth strategies, but there are signs that’s changing.

As a whole, the income group of strategies is up 9.7 percent year to date (excluding yield), which is much better than the momentum strategies. We’re also seeing higher numbers of stocks making it onto the screens and some better performances from the likes of the Winning Growth amp; Income and Quality income. We’ll take a closer look at the overall performance at the end of the year.

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