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Yields on gilts and cash beat equities for first time since financial crash

Paloma Kubiak
Written By:
Paloma Kubiak

The prospective yield on UK PLC has risen to 4%, but other asset classes such as gilts and cash saw “more dramatic” yield rises to now surpass equities for the first time since the global financial crisis.

Falling share prices combined with improved expectations for dividends meant the prospective yield on UK equities in Q2 has risen from 3.7% to 4%.

However, other asset classes saw yields rise much more dramatically, according to the Computershare UK Dividend Monitor.

It revealed the UK 10-year benchmark gilt (Government bonds) yield soared 1.2 percentage points to almost 4.7%, taking yields back to levels last seen 15 years ago.

Meanwhile, best-buy instant access cash savings accounts now offer 4.4%, up from 3.6% in April.

This means the yields available on other asset classes now surpass equities for the first time since the global financial crash.

But Computershare said dividends “differentiate themselves because they grow over time” whereas bond coupons and cash interest do not which “helps tip the scales back in favour of equities as a long‑term investment”, adding that they come with higher risks though.

Overall, it has upgraded its Dividend Monitor 2023 forecast, suggesting headline dividends are now set to fall just 1.7% to £92.4bn. This is a £1bn improvement on the prospects three months ago.

Regular dividends – which exclude one-off specials and adjust for fx– are set to rise 6.1% to £88.9bn. This is an upgrade of £2.7bn compared to three months ago.

Bank profits soar as mining dividends tumble

As part of its latest quarterly Dividend Monitor (Q2), the global financial services company revealed UK dividends fell 9% to £32.8bn on a headline basis, owing to lower one-off special payouts.

However, on an underlying basis, regular dividends totalled £32.2bn: up 3.5%, and ahead of its earlier forecast.

Banks were the biggest contributor to the Q2 growth, and with their strong profits, they paid out £7.8bn, up by 61% on an underlying basis.

Britain’s biggest bank, HSBC, has signalled it has capacity for significant further dividends and share buybacks – and is on track to become the UK’s largest dividend payer this year for the first time since 2008.

As such, this “dramatic recovery” in banking payouts mean they are expected to make the most significant contribution to dividend growth for the full year in 2023.

The ‘industrial goods and support’ sector delivered 12% underlying growth, ahead of Computershare’s forecast, with 95% of industrials delivering year‑on‑year increases.

The bank and industrials growth helped the top 100 payouts outpace the mid-caps for the first time since Q2 2021, as the pandemic had initially favoured the smaller companies which were forced to cut their dividends more steeply during the lockdowns to preserve cash. Overall, mid-cap dividends rose 3% on an underlying basis.

Meanwhile, dividends from the airline, leisure and travel sector have been the slowest to make a recovery from the pandemic. Payouts rose by two thirds but are still well below pre‑lockdown levels.

However, the biggest negative impact came from sharply lower mining dividends, which fell by a third (as forecast) as lower commodity prices impacted cash flows in the sector.

‘Record profits and resilience, but darkening UK economic picture’

Mark Cleland, CEO issuer services United Kingdom, Channel Islands, Ireland and Africa at Computershare, said: “UK companies collectively made record profits last year and have so far proved resilient in the face of interest rates, similar to their international peers, which has provided significant support for dividends and share buybacks.

“Among the three biggest-paying sectors banking and oil dividends are firing on all cylinders, compensating for much lower mining dividends, though even these remain high by historic standards.

“Forecasts for company earnings are coming down due to the darkening UK economic picture and a belief that policymakers are prepared to risk a recession to combat inflation.

“However, the dividend outlook has brightened in the short term. Banking profits are soaring as they benefit from higher interest rates, and dividends are following suit.

“Outside the banking sector, companies with pricing power are building margins, contributing to inflation but in turn boosting their dividend fire power, and there are still small pockets where dividends are still catching up after cuts made during the pandemic, which is boosting the total paid.”