Dividends wobble with 40% cuts

Recent dividend announcements have been an unwelcome reminder for some investors that peaks also have downsides.

Dividends matter to investors in UK shares. The UK stock market has historically been one of the higher yielding of the world’s major share markets. For example, on 24 May the average dividend yield in the UK, based on the FTSE All-Share Index, was 4.26% against just 1.94% across the Atlantic, as measured by the  S&P 500 Index.

The high level of dividends has made UK equity income funds a popular sector, a factor helped by over ten years of sub-1% base rates. As many investors, both individual and institutional, rely on dividend income, UK listed companies are extremely reluctant to cut their dividend payments, even when declining profits suggest they should do so.

While the UK market as a whole has a high dividend yield in terms of payments made, a handful of companies dominate. The latest survey from Link Asset Management (LAM) showed that in the first quarter of 2019 just over half of the total £19.7bn dividends paid out originated from only five companies. Number five in the top payers table was Vodafone, the telecoms company.

In May Vodafone announced that it would be making a 40% cut in its dividend. It was followed later in the month by Royal Mail also revealing a cut in its dividend of 40%. On the same day as Royal Mail wielded the dividend axe, Marks and Spencer confirmed the 40% reduction in its dividend it had revealed earlier this year. All three companies have had a strong following amongst private investors thanks to their (previous) high dividend yield and household name recognition. The trio have also each had their own structural problems, but they are not alone. For instance, many experts think Centrica, the owner of British Gas, will soon be forced to cut its generous dividend.

The lesson from May’s dividend cuts and LAM’s dividend concentration figures is that dividend data are not always what they seem. If you are looking for an income investment from UK (or overseas) shares, you need to understand the facts behind the numbers. Please get in touch  if you may be affected by dividend reductions.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.