Managers say dividends improving despite negative forecasts

UK equity income managers say companies are beginning to pay dividends again, despite research forecasting a decline in UK dividends of 6.5% this year.

The Capita Registrars Dividend Monitor warns UK dividends will fall again in 2010 as the BP disaster "puts a large dent" in firms' ability to distribute cash to their shareholders.

This year, Capita expects UK dividends to total £54.7bn, down 6.5% from 2009, and 19% less than at the peak of payouts in 2008. In the first half, UK listed companies paid out £28.6bn, down 5.4% from £30.3bn last year.

Paul Taylor, the head of dividends, says: "2010 is going o be another tough year for some income, with dividends set to fall again. The huge concentration of the UK market into a few big stocks has made investors uncomfortably reliant on a very few sources for the bulk of their income. The top 15 paid two-thirds of all dividends in the first half, so investors are, as we have witnessed, vulnerable to a one-off shock from any of these big companies."

However, Capita says the underlying picture is much more positive, as 39 more companies paid a dividend in the first half than in 2009, while the number of companies increasing or reinstating dividends rose to 189, double the number who cut or cancelled them.

"Last year, by contrast, in the teeth of the recession, almost as many companies slashed or abandoned their payouts as increased them," Taylor says.

This tallies with equity income managers' comments on dividend payouts from holdings they own.

Tineke Frikkee, manager of the Newton Higher Income fund, says six companies she holds have raised their dividends by over 10% in the past year, while five added between 5% and 10% to their payouts.

Matt Hudson, manager of Cazenove's UK Equity Income fund, expects miners Anglo American to reinstate its dividend and Rio Tinto to grow its payout in 2011, and adds the market's dividend growth forecasts for mid caps Filtrona and Morgan Crucible are too low.

"I would expect a number of companies to go back on the dividend list soon. A lot have been under the kosh, but they have restructured their debt and grown their cash flow," he says.

This year, Enterprise Inns, Bovis and GKN have all flagged plans to reinstate their dividends distributions in the coming year, while Carnival Corporation and Travis Perkins already begun paying out again.