Strong pound sits heavy on dividends

Over the long run, dividend payouts account for the lion’s share of the money investors make from the stockmarket. Unfortunately, it looks as though UK income investors are set to have a disappointing year. Growth in dividend payouts has slowed to a crawl due to the strength of the pound.

In the second quarter, UK dividends grew by just 1.2% year-on-year, one of the slowest growth rates in the past three years, according to Capita Asset Services. The trouble is that the 15 largest dividend-payers in the index – comprising 61% of the total paid out – saw their combined payouts fall by almost 1%.

The drop was largely down to the strength of sterling, which is at a six-year high against the US dollar. Many of the large multinationals that dominate the UK market do their accounting in dollars. As a result, around 40% of all British dividends are denominated in the US currency. So even though some of the top 15 raised their dividend in dollar terms, the dollar now buys fewer pounds than it did in recent months, so in sterling terms there was an effective dividend cut. A slight slowdown in global growth is also being blamed for lower payouts.

Capita has trimmed its forecast for the 2014 total dividend payments to £98.5bn. But next year things should improve. “It’s hard to imagine the currency continuing to detract from growth,” says Capita. And if sterling stays where it is now, it should only have a small impact on payouts in the first half of 2015.