In the first quarter of 2016, UK dividends climbed 6.4% year-on-year, according to the latest monitor from Capita Asset Services.

It notes that special dividends, including Mediclinic, Johnson Matthey, Next and Beazley, have more than tripled year-on-year due to weakening sterling, which partly explains the strong Q1 growth.

But the figures mask the underlying dividends, which strip out special payments – these grew just 1.3% to £13.2bn, the slowest rate of increase in a year.

Capita warns that even the modest underlying growth rate is unlikely to be sustained as it forecasts 2016 to be the weakest year for dividend growth since 2010.

The first quarter saw a number of very large companies announce dividend cuts amounting to £2.7bn and Capita says most of these cuts will bite later in the year, adding to a reduction of £3.4bn that has already been announced.

As a result, Capita forecasts dividends will fall by 1.7% on an underlying basis – that’s a £200m decline to £75bn.

Increased payouts

A few large companies are cutting payments but in the first quarter, 35 sectors increased payouts, while only four cut them. Capita said this was the best ratio in almost three years, indicating most companies are distributing more cash to their shareholders.

Shell, for instance, completed its acquisition of BG Group, and will pay much higher dividends – £10.4bn (at current exchange rates), one third more than in 2015.

Capita says this increase will “go a long way to offsetting other companies’ cuts announced in Q1” but adds this also means “UK investors are more dependent on Shell for their income”.

It will contribute £1 in every £7.50 of UK dividends in 2016, compared to £1 in £10 in 2015. The weaker pound is boosting the sterling amount Shell, and a large number of other major payers, are distributing too, by £350m in Q1.

Mid-cap companies are doing better too, Capita says, as they recorded a dividend growth of 31% to £1.4bn. This was flattered by Aberdeen Asset Management moving from the top 100 into the mid-250 list of companies, accounting for half that growth.

The vast majority of mid-cap companies increased payouts year-on-year. Top 100 dividends rose 4.2% to £12.5bn, thanks mainly to the Mediclinic and Johnson Matthey special payments. On an underlying basis they were down 1.7%.

Overall, UK equities will yield 3.6% over the next 12 months, with the prospective 12-month yield on the large-cap index standing at 3.8%, and 2.5% for mid-caps. The weight of Shell, a huge company trading on a very high yield (close to 8%), increases the overall average significantly. If Shell were excluded, the top 100 would yield only 3.4% over the next year.

Investors should not be too gloomy

Justin Cooper, chief executive of shareholder solutions, part of Capita Asset Services says: “It’s obviously disappointing to see UK dividends in decline this year, but investors should not to be too gloomy. The cuts are focused in a handful of large sectors, and so are relatively easy to avoid. If anything the risks are now finally on the upside. We are unlikely to see much more in the way of big cuts.

“What’s more, the first quarter figures show that growth is very broadly based with the vast majority of sectors seeing payouts rise, and with sterling so weak we may see bigger exchange rate gains over the course of the year. Moreover, the yield on UK equities is relatively high, as share prices have already factored in where cuts were likely to occur, and in some cases have been pricing expectations of dividend cuts where none are likely.”

Cooper adds that the volatility of the stock market over the first quarter served to remind investors how important dividends are to their overall return.

“The absolute level of dividends will be 30% higher than 2007 this year, a real increase of 4.2%, despite the intervening financial crisis and recession. The level of share prices may have changed little since the beginning of the century, but by the end of this year, the UK’s listed companies will have paid their shareholders around £1 trillion in dividends.”