UK listed companies paid out £31.4bn in shareholder dividends in the third quarter of the year – a fall of 8.4%.

But according to the UK dividend monitor from Link Group, the figures were “impacted heavily” by the delisting of BHP.

“Excluding this effect, dividends were 1% higher year on year”, Link noted. On an underlying basis, they rose 4% to £28.1bn.

Link said Q3 payouts “were a touch weaker” than expected, owing to softness in consumer basics and a slightly bigger drop in volatile mining dividends than forecast.

However, this sector will still be the biggest payer in 2022, “and perhaps even in 2023”, it added.

Meanwhile, special dividends of £3.3bn was also down 43% year on year, “driven by the end of the boom in metal mining”.

But falling mining payouts were offset by strength in banks and financials as well as oil companies.

Oil and gas payouts were up by a fifth (18.9%) year-on-year, while banks and financials saw a 49.3% jump, adding £2.7bn to shareholder incomes. NatWest made the largest positive impact, while industrials and consumer services also did well.

Weak pound, strong dollars drives dividends

Link added that the exceptional weakness of the pound also “enormously flattered the figures” – to the tune of £1.9bn. This is because many dividends are declared in dollars.

It noted: “For the full year, the extraordinary surge in the US dollar will add a record £5.7bn to UK dividends, with an even bigger effect likely in Q4 than Q3”.

Turning to mid-cap payouts, they rose faster on an underlying basis than the top 100, reflecting the tail end of the post-pandemic dividend recovery. These were up 17% compared to 11.2%.

Given the analysis, Link has upgraded its 2022 expectations for UK plc dividends to a headline £97.4bn. This is a 5.5% year-on-year increase, or 11% adjusting for BHP’s departure. Underlying dividends will rise £87.2bn, up from 15.3%.

‘Income investors have more choice’

Ian Stokes, managing director, corporate markets UK & Europe at Link Group, said: “The economic backdrop in the UK and for the wider world has deteriorated markedly in the last three months. The sharp increase in bond yields has huge implications for asset prices, asset allocation, personal finances, and government deficits. For the first time in more than a decade, the UK 10-year gilt yield has risen above the yield on UK equities, even if only briefly. Suddenly, income investors have more choice.

“Nevertheless, the high yield of the UK stock market signifies that more of the value of UK equities is grounded in the stream of dividends it provides. Although this also reflects a lower growth profile for UK Plc than, say US Inc, it also makes capital values less sensitive to rising longer term bond yields. “Moreover, we do expect UK companies to continue to deliver dividend growth over the medium and long term, which provides a level of insulation against the rising cost of living.”

Stokes added that for 2023, Link expects a further reduction in mining dividends and likely lower one-off special dividends.

“But outside the mining sector there is still room for payouts to rise, even with a weakening economy. Our provisional 2023 forecast suggests a slight drop in headline dividends to £96bn and a slight increase in the underlying total to £89bn. This implies no change in our expectation that UK payouts will only regain their pre-pandemic highs some time in 2025.”

‘Dividend income is much less volatile than profits over time’

David Smith, fund manager of Henderson High Income Trust, said: “While the economic outlook is particularly uncertain and will likely put pressure on corporate profits, history shows that dividend income is much less volatile than profits over time, so long as balance sheets are strong and dividend cover is robust. Thankfully, UK corporates strengthened balance sheets and reset pay-out ratios during the pandemic.

“This gives us confidence that overall dividend payments next year will prove resilient and although mining sector dividends will reduce, reflecting the fall in underlying commodity prices, there will be growth elsewhere, especially in financials and energy, to offset this. We do not believe that the 10-year government bond yield rising above the FTSE All Share is a cause for concern as with the exception of the last decade, equities have yielded less than bonds given they offer investors the prospects of income growth over the long-term, vital in an inflationary environment.”