Dividends flow from UK firms
SHAREHOLDERS scooped a staggering £30.7bn in dividends between January and March – a record sum, and double their haul during the same period last year.
Although the bonanza was not quite as bountiful as it seemed – half was a one- off Vodafone payment from selling its stake in US rival Verizon – it was still nearly £1billion more than the first quarter of 2013. Many fund managers believe the buoyant flow of dividends streaming out of UK companies is set to continue.
Martin Cholwill, manager of the Royal London UK Equity Income fund, says: ‘Since the financial crisis, many UK companies have had to clean up their act.
;Debts have been paid down, they have stronger balance sheets, and cash flow is significantly better than it was.’
Add to that a burgeoning UK economy and historically low interest rates, and the appeal of investing in income-paying firms becomes clear. For most, the easiest way to get a share in these rising dividends is by putting money into an equity income fund.
The aim is to produce an income 10pc higher than the yield paid out by all UK companies on the stock exchange.
As an example, take a typical yield – this is the income per share, stated as a percentage of the price – of 3.34pc. In a nutshell, this means a share costing £1 would give you an income of 3.34p.
So to get an income higher than this, income fund managers must pay a yield of 3.67pc. Today, a decent equity income fund should pay an income of around 4pc. The target for such funds is usually big, dependable companies whose products are always in demand whatever the economic weather – oil companies such as BP, drug companies like GlaxoSmithKline, engineering giants such as BAE and tobacco firm Imperial.
Alternatively, the riskier route is to invest directly into shares offering such a yield or – if you’re prepared to gamble on smaller, less established companies – a higher payout.
‘There are two key points to consider when choosing income companies: is the dividend sustainable and is it likely to grow?’ says Cholwill. He recommends investing in a mix of UK companies, including those which focus on their homegrown business such as WH Smith.
With a yield of 3.6pc in 2013, its final dividend last year was 30.7p per share – and the divi has risen every year since 2009.
He also backs firms with exposure to international markets and likes engineering firm Spirax Sarco.
It sees 80pc of its business come from outside the UK. With a yield of 2pc, the total dividend payment per share last year was 59p – another firm which has hiked income payments to shareholders every year since 2009.
For reliable dividend payments, Jonathan Jackson, head of equities at wealth management firm Killik & Co, likes oil companies such as Shell and BP and pharmaceutical firms such as GlaxoSmithKline and AstraZeneca.
AZ has paid out £16.9bn in dividends since 2007 and is currently the subject of a takeover bid from rival firm Pfizer.
Foreign exchange is also a major consideration for dividends. Many businesses pay their investors in a different currency, which can significantly affect your earnings.
Capita says just 10 of the top 20 UK dividend paying companies pay out in sterling.
But direct share buying is not the right choice for everyone. If you have a small amount to invest, it makes much more sense to put that money into a fund where the risk is better spread out.
Mick Gilligan at stockbroker Killik likes the PFS Chelverton UK Equity Income fund. Fund manager David Horner looks at smaller firms and invests in public transport firm Go-Ahead Group and construction business Galliford Try.
The fund has returned 27pc in the past year on top of the quarterly income it pays and is 4th in the 99-strong UK Equity Income fund sector.
But not everyone believes the dividend stream will flow forever.
Sheridan Adams, head of investment research at The Share Centre, says: ‘If inflation picks up and interest rates rise, then that yield that you can get from investing in one of these big companies will be easily achieved elsewhere with much less risk.’