Dividend growth returns to UK as companies start paying out

UK dividends are rising for the first time since March 2009 as Artemis’ Adrian Frost said dividend growth is back on the table.

Capita Registrars reported that for every company that cut its dividend, there are three companies reinstating payouts.

Third-quarter dividend payments are up 1.6% year on year. However, Capita noted the absence of a dividend from BP leaves “a deep scar in UK equity income”.

Frost, manager of the £3.2bn Artemis Income fund, said: “Companies have spent the last 18 months donning their best suits to impress bankers and bondholders.

“Albeit gradually, this is changing, and I expect to see more and more companies rewarding shareholders via better dividends and/or buybacks.”

Frost pointed out Anglo-American has resumed its dividend payments, with BP and Wolseley set to follow suit. HSBC, Vodafone and GlaxoSmithKline are all raising their payments.

He holds WH Smith, which has also recently announced a higher dividend and a rolling programme of buybacks to return up to £50m of cash to shareholders.

Last quarter, the top five dividend paying stocks were Vodafone, HSBC, National Grid, Shell and GlaxoSmithKline, paying a total of £7.1bn, or 41% of total dividends, according to Capita.

Since its Gulf of Mexico disaster in the second quarter, BP has suspended its dividend, and is unlikely to reinstate it until early next year. The £2bn Capita estimated BP would have paid in the third quarter would have dwarfed the total dividends from UK mid caps.

However, Carl Stick, manager of the £459m Rathbone Income fund, said dividend growth potential in mid caps looks attractive.

“In the mid-cap area we are seeing good, strong and sensible dividend growth from 5% upwards,” he said.

Mid-cap companies grew their dividends by 32% in the third quarter, but blue chips still pay out the most in absolute terms, despite a 1.7% cut.

Stick, who has a 3% position in BP, said: “I think BP will pay a dividend next year, but maybe not at the same level it did last year.

“Long-term returns from UK companies have been about 5%, and of that about 4.5% has been from dividends and dividend growth.

“If you are taking a longer-term view, a company’s ability to grow its dividend is important.”

Capita predicts UK companies will pay out a total of £55.7bn this year, compared to £58.7bn in 2009, £67.5bn in 2008, and £63.1bn in 2007.