Dividends are back – here's where to find them

Dividends are back. In the second quarter of this year, total UK dividend payouts jumped by a pleasing 51% to £25.7bn, thanks mostly to companies that cancelled dividends in March last year restarting them. Link Group (which publishes a regular UK Dividend Monitor) now forecasts that dividends should grow by around 24.4% this year, for a full-year total of £71.2bn. That is significantly less than in 2019 (just over £100bn) but nonetheless represents a good recovery with more to come as the UK economy continues to normalise. 

You can now get a yield of 3.7% on the FTSE 100 – which with interest rates at 0.1% and inflation rising doesn’t look bad at all. If you can cope with the risk of holding individual stocks there’s a lot more than that on offer: how about 6.5% on Vodafone? Those looking for a more diversified and international stream of income might consider Alliance Trust, a UK-listed trust that gives low-cost access to genuinely active management through the concentrated portfolios of ten excellent equity managers, most of whom UK investors would not have access to independently. The dividend yield is not super-high at the moment (1.4%) but it has risen every year for the last 54 years and Investec points out that the board is in the process of “reviewing the level and funding of the dividend to assess if a more attractive and sustainable level of distributions may be provided”. I suspect that it can.

On the subject of attractive and sustainable dividends, in this week's magazine we look at the Japanese market. There was a time when this was the last place you’d go for income. No longer. Today the market yields 1.7% and there are even Japanese income funds (eg, the Jupiter Japan Income Fund and the Baillie Gifford Japan Income Growth Fund). 

We often write about Japan in MoneyWeek (Olympics or no Olympics). The market has been one of the cheapest in the developed world for years and – even after a 25% rise in the last year – it still is. Whenever we point this out, some of you email to say that cheap is nice, but if something is cheap and stays cheap what use is it to an investor looking to make actual returns. What’s the catalyst? Our reply has been to note several things that might spark a shift in sentiment (and hence prices), but also to add that ordinary investors don’t really need one. Professional investors are pushed for time – they are judged every quarter. That’s why so many of them insist that their fund is run with a “value plus catalyst” strategy. But if you aren’t judged every quarter you should have no sense of urgency. A “value plus patience” strategy will do you. 

That said, a sense of what might get things moving is nice. With that in mind, listen to this week’s podcast with Joe Bauernfreund, manager of the AVI Japan Opportunity Trust. He holds a fairly concentrated portfolio of smaller stocks in Japan, many of which trade at prices not much higher than the value of the cash on their balance sheets. The trust initially aimed to be its own catalyst – engaging with companies to help them unlock that value for shareholders. But now private-equity managers have noticed the opportunities on offer in Japan, and money is flooding in. We don’t always feel happy about private equity buying too many public companies (it is bad for shareholder democracy). But it should at least spark some share-price movement.