UK companies paying a healthy dividend, historically at the core of an income portfolio, have contributed healthy returns over the long-term.
London Business School data found that the 5.2% average annual real return generated by UK shares between 1900 and 2012 would have been just 0.6% with dividends removed.
But since the onset of the global financial crisis and subsequent reduction in yields across the board, UK dividends have fallen dramatically.
Are UK dividends ready for recovery?
According to Matt Hudson, Head of the Business Cycle Team at Schroders, companies remain squarely focused on growing shareholder distributions.
This is a trend which in this low interest-rate environment is being taken ever-more seriously at the board level.
He says it should therefore be unsurprising that the UK equity market is an important income generator not just for domestically based investors with a home bias, but international ones too, who are looking at its attractions from a European or global perspective.
Hudson believes that, after a hiatus in 2013, UK dividend growth looks to be accelerating again in 2015.
This reacceleration is what you would expect as we move into the latter phases of the business cycle, and he anticipates dividend growth returning to its 5-6% nominal long-term trend level this year and next.
This makes it a deep pool for income investors, with a wide range of opportunities, from large-cap companies which offer high dividend yields to many small and medium-sized firms with exciting dividend growth potential.
Hudson argues the UK equity market will remain an important asset for those who require income today.
He says arguably this is truer for UK equities than any other developed market, as they have historically offered higher yields.
Pointing to the two key differences to previous business cycles, Hudson says wage growth has been much slower than you would have expected at this point and given how long we are into the recovery, and the capital investment (capex) cycle has not yet swung into action.
He says there have also been unique challenges posed by last year’s Scottish Referendum, the UK general election in May and the dramatic decline in energy prices.
But looking forward, Hudson believes the capex cycle should really fire if we see synchronised growth in Europe and the US. This would be a big driver for dividend growth.
And, if you believe in a synchronised recovery and the world economy moving into more of a reflationary stage, the UK equity market is packed full of companies which should perform well in such an environment. This includes selected Financials, Commodity Cyclicals and Consumer Cyclicals.
Hudson highlights domestically orientated banks as one of the most interesting UK equity income prospects.
As always, it’s important to remember that past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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