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BLOG: ‘Income investors should temper their expectations’

Martin Bamford
Written By:
Martin Bamford
Posted:
Updated:
10/12/2014

Financial planner Martin Bamford reveals his predictions for dividend payments in 2013.

New figures from Capita show that dividend payments from UK companies fell in the first quarter of 2013.

The latest Capita Dividend Monitor report shows the headline rate of dividend payments by UK companies falling by 24.8% compared to the first quarter of 2012. UK companies paid out £14.1bn in dividends to investors in the first quarter of 2013.

As is often the case with these figures, the numbers were distorted by the dividend payments made by a small number of companies.

Vodafone and Cain Energy made special dividend payments in the first quarter of last year, which added to the difference between the Q1 2012 and Q1 2013 figures. The early payment of the £1.2bn HSBC dividend in December 2012 also made the contrast between the two periods appear greater.

After taking these one-off events into account, underlying UK dividend growth was 6.1%, falling from 9.2% in 2012 as a whole.

Capita is forecasting UK dividend growth of 8.6% in 2013, as the UK economy continues to struggle.

Dividend growth is particularly important for income investors who often focus on the UK equity income sector within their portfolios.

A more selective approach to stock picking, which comes with active fund management, can help income investors retain exposure to those sectors and companies which continue to grow their dividend payouts in 2013 and beyond.

In response to these latest dividend figures and forecasts, we have already seen fund managers highlighting sectors and specific stocks which they believe have dividend growth potential. Fidelity in particular has pointed towards regulated utilities, companies with global activities and pharmaceutical companies with emerging market operations as offering good prospects for income investors.

Time have been quite tough for income investors in recent years. With low interest rates and gilt yields, it is only natural to expect lower dividend payments. Funds in the UK equity income sector remain a sensible core holding for income investors, despite diminished dividend payments and forecasts.

Income investors should temper their expectations, rather than chase higher yields from overseas or become too active in stock selection to only focus on the top dividend payers. Both approaches have their merits but introduce a great deal of additional risks to the income investment portfolio. As income investors tend to be more conservative than those primarily chasing growth, a big move away from UK equities or a big reduction in diversification can have serious consequences.

Martin Bamford is a chartered financial planner and founder of IC Direct