25th July 2013
The latest research from Capita Registrars shows second quarter dividend payouts by UK firms hitting an all time high. Underlying dividend growth was 9.5%, with media, financial services and food producers all notching up double-digit dividend growth. Should this lure investors back to the UK Equity Income sector, and away from the increasingly popular global equity income sector asks investment journalist Cherry Reynard.
Certainly, the headline numbers for UK dividends look good. UK firms paid out £25.3bn over the quarter, the largest ever quarterly total. Equally, that growth was evenly spread rather than being drawn from specific companies. Antofagasta, Standard Life and ITV all paid special dividends, but the overall level of special dividends was down on last year and a broad range of sectors increased their dividends as Reuters reported.
UK equity income funds have pipped Global Equity Income funds in performance terms over the past five years. The average global equity income fund is up 44% over three years, while the average UK equity income fund is up 46.6%. The sector has also outperformed over six months and one year, perhaps surprising in a climate of buoyant markets.
However, while UK equity income has been a strong sector in recent years, Capita is not as optimistic about the outlook. It reduced its forecast for the growth in UK dividends to 7.7% from 8.6%, equivalent to a reduction of £500m. Of course, in a climate of near-zero economic growth and inflation of above 2%, this is still an attractive growth rate, but investors may still be drawn to the higher dividend growth available overseas.
In this, there is increasing choice. This Mindful Money piece shows that dividend payouts from US companies rose by $17.6bn in the second quarter, an overall gain of 17%. Payout rates remain at historic lows, at 36%, which suggests that there is scope for companies to continue increasing their dividends. Equally, Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, says that he sees positive indicators for dividends, including earnings coverage and record high cash levels.
It is a similar situation around the globe. Jason Pidcock, manager of the Newton Asian and Emerging Market Income funds, argues that there is increasing choice for income investors in developing markets: “Local investors (in developing markets) are asking for higher dividends. Sovereign wealth funds, for example, are very demanding. Companies in these countries are very commercially driven. CEOs get replaced.” CEOs, in fear of their jobs, have to respond to the desires of influential investors and those investors are demanding higher dividends.
However, for global equity income managers, as for those in the UK, there is a valid question over whether dividend stocks have become too expensive. Equally, this may be more pronounced in higher risk markets – emerging markets, Europe – where investors have sought to take a lower risk approach, than it is in areas such as the UK.
Certainly dividend yields on some high quality stocks have fallen. Artemis’ Global Equity Income manager Jacob de Tusch-Lec has said that higher valuations are forcing investors to choose between higher absolute dividends and dividend growth. Stocks that combine the two now look too expensive. Pidcock feels that valuations look ‘fine’, though he admits that opportunities are scarcer than they once were.
David Hambidge, head of multi-asset at Premier Asset Management, says: “I still think that the UK is the most robust and reliable dividend market in the world. Until we are convinced otherwise, we see no reason to go too far into global equity income funds.”
Where he has held non-UK income funds, they have generally had a secondary purpose in the fund – the Prusik Asian Income fund was designed to give access to the higher growth Asian region, the Jupiter Japan Income was a recovery play on Japan. He has also held some European income funds as a way to gain access to a higher beta area, through a lower beta fund.
Diversification is the strongest argument in favour of looking outside the UK. The UK Equity Income sector can be homogenous, with the larger funds holding the same large, blue chip stocks. Going global offers a lower risk way to access higher risk markets. However, there are ways to achieve greater diversification through UK Equity income as well. Increasingly there are a range of small cap dividend funds from groups such as Unicorn, Chelverton and Miton, which have been strong performers and invest outside the standard equity income fund fare.
Investors are coming back to UK Equity Income. According to the Investment Management Association, it was the most popular sector in April. However, its recent popularity has certainly not matched that of the global equity income sector. Investors should certainly not neglect UK equity income stocks, where they can achieve strong and reliable dividend growth within a (relatively) stable economic environment, even if the outlook is not quite as rosy from here.