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Dividends rocket to new record high but are they sustainable?

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Dividends paid out to investors across the globe rose to a new record high during the second quarter of the year, according to the latest edition of Janus Henderson’s Global Dividend Index.

In total around £347m was dished out to investors, an increase of 5.4% on the same period last year.

The UK was the only region which didn’t see a rise, falling 3.5%.  However, this was in large part down to the weaker pound. When allowances were made for exchange rates, the UK saw underlying growth of 6.1%.

Dividends grew across almost all industries and sectors, with financial firms in particular seeing large growth, accounting for half of the global headline increase. Only telecoms firms saw payouts fall slightly.

Alex Crooke, head of global equity income at Janus Henderson, said that the improvement in dividend payouts follows two years in which dividend growth has been rather subdued.

He continued: “The first half of 2017 has been stronger than we expected, and the second half is looking promising too. Moreover, the US dollar has weakened a little further against many currencies since our last report, so it will prove less of a drag on the headline figures in the second half if it maintains its current levels.

“Taking a global approach means a slowdown in any one part of the world has less impact on your overall income level, but investors will be pleased they are enjoying one of those periods when there is synchronised underlying dividend growth across all regions of the world.”

Dividend taxes are changing

Investors who predominantly look for dividends from their share picks should bear in mind that the way dividend income is taxed is set to change.

The government aims to reduce the tax-free allowance on dividend income from £5,000 all the way down to £2,000 from April next year.

The move is likely to see around 90,000 investors hit with a higher tax bill.

Darren Cornish, director of customer experience at The Share Centre, said: “One thing they may wish to consider is selling their investments and repurchasing them within an ISA, sometimes known as ‘Bed and ISA’. Investors need to be aware that they may need to pay stamp duty, if applicable, and that their repurchased holding will be slightly smaller due to the ‘sell’ price being lower than the ‘buy’ price. However once investors have made this switch they have the peace of mind of knowing that their future dividend income as well as any capital gain is tax-free.”

Should investors worry about dividend cover?

Another concern for some investors will be just how sustainable dividends are.

According to research from The Share Centre, dividend cover – a ratio produced by dividing profit after tax by the dividends paid out to investors – is now at its lowest level since 2009, having fallen by 18% in the last year.

Dividends have now exceeded the profits made by the firms paying those dividends for at least the last five quarters, the study found.

Helal Miah, research investment analyst from The Share Centre, said: “Dividend cover is still weakening, and this will ring alarm bells for income investors, especially as the outlook for the UK economy is moderating.”

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