The squeeze on dividends

Investors in British stocks could be facing an income crunch as dividends come under pressure.

The vast majority of long-term stockmarket returns stem from reinvested dividends, not capital gains. Unfortunately, investors in British stocks could be facing an "income crunch", says The Sunday Telegraph's Kyle Caldwell. Two key metrics suggest that payouts are looking stretched and could be cut.The payout ratio the percentage of earnings paid out in dividends for UK stocks is above 60%. In most overseas markets the figure is around 40%.

The dividend cover, the extent to which profits after tax exceed dividends, recently fell to a post-crisis low of 1.2. Generally, a level of two is considered safe; the lower the cover, the more unaffordable payouts look. Similarly, "I feel more comfortable when the payout ratio is 50% or lower", says James Davidson of the JP Morgan Global Equity Income fund.

Big companies may be the most vulnerable. Fifteen blue chips accounted for 60% of the UK market's income last year, and slower global growth, the oil-price slide and the supermarket wars have hit profits at the likes of Shell and Tesco. Research group Capita expects dividends to grow by 3% next year, down from near 7% in 2015. Income investors may have a tough year.

Recommended

The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
How the FTSE 100 could get propelled to 10,000
FTSE 100

How the FTSE 100 could get propelled to 10,000

It would have seemed crazy just months ago, but British blue-chip stocks are about to get a big boost that could take the FTSE 100 index to 10,000, sa…
21 Mar 2021
The FTSE 100 index is ready to rally
UK stockmarkets

The FTSE 100 index is ready to rally

The FTSE 100 index – made up of unfashionable “old economy” stocks – has lagged other major stockmarkets. But global reflation should see its weakness…
19 Feb 2021
UK stocks: how the FTSE 100 is finding its feet again
UK stockmarkets

UK stocks: how the FTSE 100 is finding its feet again

The FTSE 100, Britain’s blue-chip stockmarket index, has undergone constant churn in the 37 years since its inception, says Max King. But it is now …
12 Feb 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
The FTSE 100 has clawed back above 7,000 – how much higher can it go?
UK stockmarkets

The FTSE 100 has clawed back above 7,000 – how much higher can it go?

The FTSE 100 index has risen to over 7,000 for the first time in over a year – it now sits just above where it was in 1999. But its era of neglect cou…
19 Apr 2021
The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021