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Warning for income investors as UK dividend forecast falls

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Savers who invest in the UK stock market for income should remain “on guard” following a number of high-profile dividend cut announcements over the past quarter, AJ Bell has warned.

Forecasts for FTSE 100 dividends have fallen for the second quarter in a row, with total pay-outs expected to reach a record £91.2bn in quarter two, a fall of £2.5bn from the £93.7bn forecast at the beginning of the year, the investment firm said.

Despite forecasts falling, the FTSE 100’s dividend yield – how much a company pays out in dividends each year relative to its share price – is expected to be about 4.5 per cent

However, Russ Mould, investment director at AJ Bell, said investors cannot take this dividend yield for granted.

“A number of announcements over the past quarter show that investors must remain on their guard,” he said.

“Marks & Spencer and Vodafone have both announced dividend cuts and former regular dividend-raiser Flutter (previously Paddy Power Betfair) has confirmed an unchanged annual payment for 2018.

“Management at Standard Life Aberdeen has set a goal of an unchanged distribution after a long string of increases and Aviva also has a more conservative outlook for dividend growth than it has before.”

Reliant on banks

Savers should also be aware that just 10 stocks are expected to generate 64 per cent of 2019’s forecast £5.6bn increase in total dividend payments, with RBS generating a fifth of that sum on its own.

Barclays and HSBC are also expected to be among the list of the 10 largest contributors to dividend in growth in 2019.

Mould said: “Financials, oil & gas and consumer staples (such as tobacco and beverages) dominate in terms of their total dividend contribution and the banks remain particularly important to dividend growth forecasts.

“The combined dividend payment from the Big Five banks is expected to exceed the pre-crisis peak of some £13.3bn.

“This makes concerns over the economy, both in the UK and worldwide, particularly important as the first-quarter results did little to assuage concerns over the lack of progress in net interest margins.

“The prospect of interest rate cuts from Western central banks, not increases, is an additional complication when it comes to banking margins, even if they are designed to boost economic growth and thus demand for credit.”


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