Britain’s decision to quit the EU “has immediately and materially changed the outlook for dividends”, according to the latest UK Dividend Monitor from Capita Asset Services, which looks at the market’s 350 biggest stocks.
Thanks to sterling’s post-vote slump, dividends paid in dollars or euros will be worth more to British investors. Around 40% of the dividends paid by British companies are in dollars and euros. Firms in the FTSE 100 index get the biggest boost from a depreciating pound, as they make around 70% of their sales abroad. The upshot is that UK income investors are in for an overall exchange-rate boost of £4.3bn, which should ensure that underlying dividends (excluding special payouts) rise to £76.9bn in 2016, a 0.5% increase on last year.
Investors should be wary, however. The post-Brexit exchange-rate boost may be welcome, but dividend cover among blue-chip stocks is at a multi-year low. And forecasting currency movements is notoriously tricky – in the long run, profits growth is what really matters for generating sustainable, growing dividends. Enjoy the gains while they last.