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

Barry Norris: we’re already in the 1970s. Here’s how to invest
Investment strategy

Barry Norris: we’re already in the 1970s. Here’s how to invest

Merryn talks to Barry Norris of Argonaut capital about the parallels between now and the 1970s; the transition to “green” energy; and the one sector w…
19 May 2022
Tech stock crash – dotcom bust 2.0 is upon us
Tech stocks

Tech stock crash – dotcom bust 2.0 is upon us

It’s carnage in the tech sector as the market crashes. But that spells opportunity for canny investors, says Matthew Lynn
19 May 2022
The tech-stock bubble has burst – but I still want a Peloton
Stockmarkets

The tech-stock bubble has burst – but I still want a Peloton

Peloton was one of the big winners from the Covid tech boom. But it's fallen over 90% as the tech stock bubble bursts and and everything else falls in…
19 May 2022
Investor optimism ebbs in Indian stockmarkets
Emerging markets

Investor optimism ebbs in Indian stockmarkets

India’s BSE Sensex stockmarket index has fallen by almost 8% so far this year. Interest rates are on the rise, and foreign investors have been selling…
18 May 2022

Most Popular

The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
Inflation is now at its highest since 1982 – is this the peak?
Inflation

Inflation is now at its highest since 1982 – is this the peak?

At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active a…
18 May 2022