The quality of dividend growth in the second quarter of the year was described as “relatively poor” after exchange rates and special large dividends drove numbers upwards.
UK dividends rose by 14.5% on a headline basis to £37.8 billion (€42 billion) during the second quarter – but this figure included a temporary boost provided by a weak pound and exceptionally large dividends.
The underlying growth, which excludes large special dividends, was 5% and was weaker than expected.
Despite the total paid out reaching an all-time high, exchange-rate gains made up almost half the increase.
Large-cap companies saw a faster rise in pay-outs than their mid- and small-cap counterparts, as they benefited from a disproportionately weaker pound, according to research by Link Group.
The bulk of the headline increase that came from huge special dividends included Rio Tinto, Micro Focus International, and Royal Bank of Scotland. Barclays also paid out its largest post-financial crisis dividend and the banking sector was one of the top performers throughout the quarter.
Rising share prices have also led to lower yields on equities since January – but they are still high by historic standards.
This signifies that UK shares are underperforming amidst growing concerns over the UK and global economy, according to Link.
“As the world economy slows, and a looming Brexit exacerbates the underperformance of the UK economy, corporate profits are under pressure and that is limiting the scope for dividend growth,” said Michael Kempe, CIO of Link Market Services.
“Q2 marks both the second upgrade this year to our headline forecast and the second downgrade to our underlying one. The true picture for dividends this year is therefore notably weaker than a first glance might suggest.”
Link’s headline forecast for 2019 is set at £107.4 billion, an increase of 7.6%, based on the fall in the value of the pound, and stronger special dividends.
Excluding volatile special dividends, the forecast is for 2.9% of underlying growth – around two thirds of which is down to potential exchange-rate gains. The underlying dividends forecast has been downgraded by £500 million to £98.7 billion.
Stephen Message, equity income fund manager at Legal & General Investment Management, said: “Investors should be mindful that Sterling is likely to be volatile in the coming months and any improvement in sentiment concerning Brexit negotiations may provide some relief in what feels like an increasingly consensual and crowded trade.”
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