UK equity income managers are still forecasting dividend growth across the market this year, despite income behemoth BP suspending payouts until at least 2011.
BP last week scrapped its first quarter dividend, which was scheduled for payment
on 21 June, and also declared no dividends would be paid in the second and third quarters of 2010.
Its move is a huge blow for investors in the UK, particularly millions of people in pension funds and equity income vehicles. BP dividends account for around £1 in every £7 of share payouts from UK blue-chip firms and have not been slashed since 1992. The last time BP suspended a dividend payment was during World War II.
While the BP action will have an impact on the overall market yield, LV= head of UK equities Graham Ashby says dividend growth in a number of other stocks will more than compensate for the oil giant's lost payouts.
"Balance sheets across the market are as strong as they have been for a decade and profits are also coming through. Many companies are in great shape," Ashby says.
"Research last week suggested the UK market could withstand a BP cut. While the cancelling of the already declared dividend was disappointing, it is not all doom and gloom.
"Stocks such as Barclays, Carnival and Rio Tinto, which yielded nothing last year,
are all back on the list of dividend payers."
Ashby, who is retaining 3% of his LV= UK Equity Income fund in BP, says the oil giant could return to paying significant dividends in nine months to a year's time, once more clarity over the spill emerges.
BP says it remains strongly committed to the payment of future dividends and delivering long-term value to shareholders.
"The board believes it is right and prudent to take a conservative financial position given the current uncertainty over the extent and timing of costs and liabilities relating to the spill," it says.
Tineke Frikkee, a large BP shareholder in her £2.66bn Newton Higher Income fund, says the vehicle remains on track to deliver 3% dividend growth for the year to 30 June.
She says the UK market still has a number of attractive sectors generating high yields, including telecommunications at 5.8% and pharmaceuticals at 4.9%.
Fidelity Income fund manager Michael Clark, who exited his position in BP following the oil spill, is also confident on dividend growth for the market.
"While it is a problem for the income funds that held the stock, it will not have the same impact as when the banks cut their dividends as that ran across a number of names.
"We expect double-digit dividend growth and the market could also increase.
"BP was not a problem we could not avoid and we are still able to reach our income with stocks such as pharmaceuticals, utilities and telecoms."
