Income Investors Face 'leaner Year' For UK Dividends

Vodafone and Marks & Spencer were recent high-profile examples of firms opting for cuts of 40% and 26% respectively in May, leading to punishing falls in their share prices and opening up buying opportunities for some equity investors.

UK Dividend Monitor: Financials help headline dividends approach £100bn in 2018

This followed an expectation-beating total of £99.8bn paid out by UK companies in 2018, followed by a record Q1 dividend total of £19.7bn, according to Link Asset Services (LAS), with the UK witnessing strong and consistent dividend growth for the past five years, according to Sharecast.

However, the Q1 dividend count was heavily influenced by one-off special payments, and Link indicated at the time that dividend growth would be slower than previously anticipated this year, down from 5.3% to 3.9% for 2019.

Chief market analyst at IG Group Chris Beauchamp said the UK has seen a "seismic shift in dividends" following a record multi-year run and it "would not be surprising to see a lot of other [companies] easing back on their dividends".

Beauchamp said equity income investors who are "unnerved after such a tough run over the last few weeks", should expect a "leaner year" as a combination of pressures face UK companies.

He explained: "It is an uncertain time; we are facing bigger issues now than we have done for a while.

"Clearly Brexit remains front and centre and we are yet to see what impact the US/China trade wars will have on the UK. 

"We should be expecting more weakness to come through in terms of dividend growth, we should not assume that the outlook is going to remain rosy."

Beauchamp highlighted utilities as "a prime target for cuts over the next few years", as well as high street retail brands. 

UK dividends hit Q1 record at almost £20bn

Management 'getting real'

David Coombs, head of multi-asset investments at Rathbones, agreed that issues such as Brexit, a slowing economy and evolving consumer trends are among those forcing boards to consider sacrificing high dividends in favour of investing more in their businesses.

He said: "There is massive disruption going on in many sectors across economies driven by technological changes, consumer changes and political changes, for example. You will have to see more dividend cuts this year."

Coombs said he voted in favour of Vodafone's dividend cut for this reason, and despite "the CEO getting rewarded with a 10% smack on the share price", it was "the right thing to do".

He used the share price decline as a buying opportunity, which has already paid off with Vodafone recovering its lost ground in the weeks since the dividend cut.