Reinvested dividends account for the majority of long-term returns from stocks; capital gains only play a small part. So it’s good news that British stocks are paying out record levels of income. According to the Capita Dividend Monitor from Capita Asset Services, UK dividends reached £27.2bn between July and September, up 6.8% up on the year before. Strip out special dividends, and underlying growth was still a healthy 5.9%.
The strong dollar helped. Half of the dividends by value from the top 20 payers are declared in dollars, providing a windfall of £600m and raising the third-quarter dividend growth rate by 2.4%. Mid-cap dividend growth jumped by 31% including special dividends; strip these out, and they rose by 11%. In 2015 as a whole, underlying dividends in the FTSE 350 will reach a new annual record of £84.8bn, reckons Capita.
But dividend growth looks set to slow to around 3% next year. The commodity sector looks likely to announce more cuts in payouts, with Glencore already announcing one of £1.5bn. The FTSE 100 is heavily weighted towards energy and mining. The emerging-market downturn has also undermined dividend growth, with Standard Chartered announcing a cut for next year.
The currency effect, moreover, is fading. Mid-caps’ payouts are set to keep growing faster as they are less exposed to global turmoil. In all, the UK market will yield around 4% in the next 12 months, which “still compares very favourably to other asset classes”.