The latest Computershare Dividend Monitor paints a gloomy picture for UK dividends. It shows a drop of 0.4 per cent in underlying payouts, after mining companies reduced their distributions.
The UK is already a tough place to invest, but its robust dividends have been a key selling point. Does this tip the balance in favour of looking for dividends elsewhere?
UK dividends rose to £92.1bn in 2024. This was a rise of 2.3 per cent on a headline basis, but included £5.6bn of one-off special dividends. Excluding these payments, overall dividends fell year on year, with the mining sector reducing its payouts by 40 per cent to £4.5bn. The mining sector had been the UK’s largest dividend-paying sector between 2021 and 2023.
At best, this is an unexciting picture. However, it is worth noting that UK equity income funds were relatively strong in 2024 in spite of consistent outflows from the UK market. The average fund was up 8.7 per cent. While the average global equity income fund was up 11 per cent, it was still a creditable performance from a sector that is increasingly overlooked.
Equally, the UK market continues to have a markedly higher yield than other countries. The dividend yield on the FTSE All Share is 3.5 per cent. The FTSE World has a dividend yield of just 1.8 per cent, and no other major market comes close to the UK – North America is just 1.3 per cent, Europe 3 per cent and Japan 2.3 per cent. Even the FTSE Small Cap has a yield of 4.2 per cent. The options in the UK market for high income are plentiful.
Apart from the beleaguered mining sector, the dividends in the UK market look relatively healthy. Matt Bennison, a fund manager at Schroders, says on dividend cover: “In the 2010s, the UK investment community put too much pressure on companies to over-distribute dividends at the expense of investing in their own growth opportunities.
“In the run-up to 2020, dividend cover got below 2x. The Covid pandemic provided an opportunity for companies to reset dividends. This has meant most companies exited the pandemic in a much healthier position. Now dividends are 2x covered by earnings and companies have surplus cash. Less than half is put towards dividends and the rest goes towards organic growth opportunities or buybacks.”
Equally, 77 per cent of companies raised dividends or held them steady year on year in 2024, and the typical (median) per-share growth rate at company level was 4.5 per cent. That gives active managers plenty of options.
VT Tyndall Unconstrained UK Income, for example, grew its income distribution by 4.7 per cent in its latest set of results, and stated: “We still see many exciting dividend growth opportunities in the current portfolio over the years ahead.”
Multi-asset funds, where managers have a choice of where to source income, often have higher weightings in the UK. Jupiter Merlin Income Portfolio still has more than 30 per cent in UK Equities, and just 20 per cent in global equities. The Aegon Diversified Monthly Income fund has its second highest single weighting in UK equities, at 28 per cent, just behind US equities at 33 per cent.
Looking further afield
That said, there are real opportunities elsewhere. Michael Rossi, portfolio manager on the JPM Global Equity Income fund, says: “Global equities are now on the cusp of a remarkable period of dividend growth, with not just a cyclical upswing in payouts, but structurally higher dividend momentum.” Dividend payout ratios are now close to 25-year lows and he sees plenty of room for that to grow.
This view is supported by research from Allianz Global Investors, which shows that dividends in the MSCI Europe are expected to rise to record highs in 2025. Dividends are expected to be €459bn (£382bn) in 2025, up 4 per cent year-on-year. This rises to €496bn in 2026, up 13 per cent from 2024. At a sector level, information technology and healthcare are among the sectors with the highest expected dividend increases for 2025.
£92bn
UK dividends rose to £92.1bn in 2024.
The most recent Janus Henderson Global Dividend Index presented a similarly rosy picture for dividends in Asia Pacific, with China, India and Singapore all seeing record quarterly payouts. India also saw strong growth across a broad range of companies. There were declines in Australia, Taiwan and Hong Kong.
Dividend payments are diversifying, with groups such as Meta and Alphabet starting payouts to shareholders in 2024. TSMC has been a stalwart of Asian equity income portfolios. It is the top holding in the Schroder Oriental Income Trust, for example, which has around 30 per cent in the information technology sector. Investors will need to go beyond the UK to capture this new wave of dividend payers.
It is perhaps the diversification argument that is the strongest for holding a balance of UK and global dividend companies. Active managers can uncover opportunities in most markets, even if the aggregate dividend payouts are falling. However, there are some sectors that simply do not appear in the UK market – with technology perhaps the most obvious.
In reality, the UK market is still one of the strongest sources of dividends, and its current weakness is attributable to a single sector, rather than a structural problem. That said, some of the old arguments still apply: it is focused on a handful of sectors, and misses out on some key areas such as technology. This is why it needs to be balanced with the broader opportunity set elsewhere.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre