Strong pound brings down dividends

Investors have been enjoying a period of unusually high dividend payouts. But the strong pound threatens to wreck the party.

Studies repeatedly show that reinvested dividends account for the lion's share of long-term returns from equities. So it's good news that British dividend payouts hit an unprecedented £30.7bn in the first quarter, just over double the figure for last year's period, according to the latest annual dividend monitor from Capita Asset Services.

The figure is skewed, however, by a special (one-off) payout of £15.9bn from Vodafone a British record.

Underlying dividends only grew by 3.3%, the smallest rise in two years. That's because British income investors are "unusually exposed" to changes in the exchange rate, says Capita. Big global companies dominate the market.

Nine of the top 20 dividend payers calculate their accounts in dollars, and 40% of overall dividends are denominated in dollars. Sixty-eight of the top 350 companies use dollars or euros.

Sterling has been strong against both currencies over the past year, gaining 12% against the greenback and around 8% against the euro, trimming British investors' income. Three of the five biggest dividend payers, Shell, BP and HSBC, are set for small declines in payouts in sterling terms this year.

The poor backdrop for oil and mining groups, who comprised over 25% of first quarter payouts, is also worth noting.

Capita reckons the sterling's strength could cost investors £3.5bn in dividends this year. The overall outlook for dividends remains positive, with the recovery set to bolster earnings. But sterling has become an increasingly strong headwind.

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