Investors in UK firms were paid the highest ever amount of income from regular dividends last year, but the figure was flattered by currency exchange and the first fall in six years is predicted for 2016.
Total dividends from publicly listed UK companies reached £87.6bn in 2015, according to the latest Dividend Monitor study by admin firm Capita Asset Services.
This was actually 10pc lower than the year before, but only because the 2014 figure was inflated by Vodafone’s special dividend after the sale of US business Verizon.
Underlying dividends excluding special dividends were £84.6bn, 6.8pc higher than the year before and a record.
Beneath the headline figure were worrying signs, however.
The rate of growth slowed as the year progressed, from 7.9pc at the start of 2015 to 5.4pc at the end. What’s more, half of the total gain was accounted for by the strengthening of the US dollar – the currency in which two fifths, by value, of UK company dividends are paid – versus the pound.
Cuts to dividends among some of the largest payers, including bank Standard Chartered , Centrica and some food retailers, held the total back. This was offset in part by strong growth of dividends from the UK’s smaller companies.
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FTSE 250 dividends grew by 22.6pc, the fastest growth since 2011, but still only accounted for £10.2bn of the total £87.6bn paid out by companies.
This highlights the dependency of income seeking investors on the very biggest payers.
Telegraph Money has highlighted the crunch on income, in particular the rapidly dwindling margin by which companies can afford their dividend. Average “dividend cover” – the ratio by which a dividend is exceeded by earnings – has been falling.
This has put pressure on the funds that invest for income and some experts predict that many popular UK Equity Income funds will have to pay less in the year ahead. In 2015, one in five such funds had to cut their payments to investors.
Investment trusts (see box) can offer investors a more resilient income because they are able to hold back the income they take from companies in the good years in order to maintain income payments when times are tougher. As such, some trusts are able to build track records of dividend payments running to several decades.
Will Meadon, fund manager of JPMorgan Claverhouse Investment Trust, which has a 42-year track record of consecutive annual dividend increases, said: “Capita’s latest quarterly dividend monitor reiterates our view that UK dividends are on average going to be lower in aggregate in 2016.
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“On the surface, this fear might appear unfounded. For example, both the oil and mining sectors would appear to offer attractive dividend yields: BP ostensibly offers a prospective yield of 7.7pc, Shell 8.0pc, whilst BHP Billiton’s yield of over 11pc is surely irresistible?
“Regrettably, the market is not so inefficient as to offer investors such mouth-watering yields without them also coming with a huge health warning. Such ostensibly high yields pose substantial investment risk to the unwary investor, as they may indicate unsustainable dividends over the medium-term.”
Mr Meadon said that sectors with strongly supported dividends included housebuilders and tobacco companies.
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