A new report on UK dividends paints an improving picture and brings good news for Courtiers investors.
Computershare Investor Services PLC’s UK Dividend Monitor Report for Q2 predicts that over the course of 2023, regular payouts made by UK listed firms will reach £88.9bn. Although this is down slightly on 2022, it’s almost £2.7bn more than the figure forecast three months ago and equivalent to an underlying increase of 6.1% for the year.
Where the FTSE 100 currently has a dividend yield of 4.2%, the dividend yields on both the Courtiers UK Equity Income Fund and the Courtiers Global (ex-UK) Equity Income Fund are higher at 5.50% and 4.84% respectively. To varying degrees, depending on what proportion of their assets are equities, the Courtiers Multi-Asset Funds also hold shares in dividend yielding stocks.
How do Courtiers investors benefit from dividends?
Dividends paid out by companies held within the Courtiers Funds are paid to Courtiers. The most obvious beneficiaries are investors in the income share class units of the Courtiers UK Equity Income Fund, who receive a distribution from Courtiers directly into their investment accounts.
The other Courtiers Equity Funds, the Courtiers Multi-Asset Funds and the Courtiers Investment Grade Bond Fund are accumulation funds. Rather than clients receiving distributions directly from Courtiers, these are retained within the funds by Courtiers before being reinvested. Receiving distributions in this way increases the price of accumulation units, which is reflected in a higher price relative to the income units of the same fund.
Dividends in the Courtiers Funds
Companies that don’t pay a dividend are screened out as part of Courtiers’ stock selection process. Should a company held within the Courtiers portfolio decide to stop paying dividends, 99 times out of 100 it would be sold. A notable exception was in 2020 when several companies in which Courtiers was invested scrapped shareholder payouts to stave off the impact of the pandemic. All but two companies have since resumed payouts.
The report looks at the contribution of different economic sectors to dividends. While some sectors including retail have cut back on dividends, banking is the standout performer with banks on track to raise headline payouts by more than £3bn this year, primarily as a result of higher interest rates. This is a significant turnaround from just three years ago when the UK banking sector was prohibited by the regulator from paying any dividends.
Among the banks that have steadily raised their dividends since the ban was lifted are Lloyds and Barclays, both of which Courtiers holds – their shares yield 5.93% and 5.37% respectively. After reinstating dividends, the dividend per share and the dividend yield for both banks are now higher than they were in 2019. Both banks also executed share buybacks in the last year, which will have further boosted shareholder returns.
After pausing its dividends during 2020, residential developers Taylor Wimpey resumed payouts to shareholders in 2021. Since then, it’s progressively increased its dividends and also executed share buybacks. The current dividend yield is 8.10%, which although healthy is still not at the level it was. In 2019 shareholders received a special dividend payment – something a company might make if it’s had a good year or done particularly well. Another reason a company might make special dividend payments is because they are flush with cash having sold part of the company.
Taylor Wimpey is a good example of the kind of company Courtiers favours – a cash generative company, with a track record of paying and ideally growing dividends.
Marks & Spencer, another Courtiers holding, suspended its dividend in April 2020 to preserve cash and protect its balance sheet. Despite the suspension, Courtiers remained invested. Up until 2020 the company had paid a dividend every year since 1989 and the Investment Team had every expectation that it would resume payments to shareholders once its liquidity position and profitability improved. Recently, Marks & Spencer announced its intention to reinstate its dividend – welcome news for the Investment Team and Courtiers investors.
Other companies paying a healthy dividend in which Courtiers holds a stake are Reach, STV and ITV, which currently yield 9.75%, 5.65% and 6.91% respectively. Vodafone currently yields 10.89%, BT 6.78% and Regional REIT 15.03%.
“Dividends are a signal to investors that the management of a company is confident about its future prospects.”
Sam Keen, Investment Analyst
While a good dividend is generally a positive sign, the sustainability of dividends is also vitally important when selecting stocks. Centrica, in which Courtiers has a stake, is a good example of such a company, being so cash generative that it can afford to invest in maintaining its infrastructure and return cash to shareholders.
By way of contrast, although National Grid yields an attractive looking 5.79%, further analysis by Courtiers concluded that its dividend is relatively unsustainable. Not only is National Grid not that cash generative – it’s also committed to higher capital expenditure, particularly on green energy initiatives. Where a company’s dividends are unsustainable, the risk is that they will be cut or stopped completely, with likely negative consequences for the share price.
Returning lots of cash to shareholders might appear attractive, but it may not always be in the best interests of investors, especially over the medium or longer term. Part of a Courtiers Analyst’s role is to weigh up whether, rather than paying out to shareholders it would be better for the company to invest the money back into the business to boost future returns.
Courtiers looks for companies with consistent dividend policies rather than those that continually raise and decrease dividends, according to the business cycle. Constant flip-flopping is a signal that management doesn’t really know where the business is going next.
The broader picture
One notable finding of the UK Dividend Monitor report is the collapse in special dividend payments. Although Courtiers likes special dividends, companies that pay a regular common dividend are of greater interest. If they also pay a special dividend, that’s a bonus.
The findings of the report are indicative of where the economy is currently. Going forward, we’re optimistic that dividends across all sectors will pick up, although this is dependent on the fortunes of the economy. For Courtiers investors, we’re heartened that Marks & Spencer, intends to resume paying a dividend.
Dividend payouts by UK-listed firms are proving remarkably resilient and assuming the UK Dividend Monitor Report is right, the picture is set to brighten, at least in the short term. Given this and Courtiers’ ongoing commitment to selecting companies with a strong record of returning cash to shareholders, investors and particularly those in the Courtiers Equity Funds can expect dividends to continue making a significant contribution to their investment returns.