Dividend payouts drop – does the UK still offer a good income opportunity?

Dividend payouts dropped by 8% last quarter, but UK equities could still offer strong opportunities for income-hungry investors.

Total payouts came to £25.6 billion in Q3, according to financial services company Computershare. This is down from £27.8 billion a year ago, as cuts in the mining and utilities sectors took their toll, alongside a drop in one-off special dividends.

Despite this, “dividend growth in the third quarter was much more encouraging than the figures suggest,” says Mark Cleland, chief executive of issuer services at Computershare.

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Indeed, median (or typical) growth at the company level looked more promising at +4.5%. Mid-cap companies also posted better underlying growth (+3.6%) than the top 100 firms (-4.4%). Furthermore, if the mining sector was excluded, Computershare says the underlying growth rate overall would have been +2.6% on a constant-currency basis.

Large share buybacks are also partly responsible for the lower headline figure. Share buybacks have become increasingly common in the UK equity market in recent years, as companies take the opportunity to snap up their stock at low valuations.

Share buybacks reduce the number of shares in issuance and use up cash that might otherwise be paid out in the form of dividends. But investors should remember that “buybacks mean additional cash reaching shareholders, albeit in a different way,” explains Cleland.

Given how common buybacks have become, Cleland says they “need to be taken into account when understanding the overall increase in cash distributions by UK companies”.

As well as buyback activity, a stronger pound also contributed to the lower headline figure.

Until recently, the Bank of England appeared to be taking a more hawkish stance on rate cuts than other central banks, and this caused the value of the pound to rise. Cleland points out that this “negatively impacted the two-fifths of UK dividends that are declared in US dollars”.

Which sectors and stocks paid the highest dividends?

Banks were the biggest dividend payers in Q3, accounting for £3.3 billion of the £25.6 billion total. However, dividend growth in the sector was broadly flat compared to the same period a year ago, at 1.1%.

The mining sector was the second biggest contributor to the overall figure, paying out £2.9 billion in total, but this constituted a 32.9% drop on a year ago.

In terms of their contributions to the overall percentage growth figure, the mining and utilities sectors made the largest negative impact this quarter and pharma and industrials made the largest positive impact.

Top five sectors

Meanwhile, the top five companies with the biggest payouts were Rio Tinto, Shell, National Grid, HSBC and British American Tobacco. Collectively, they were responsible for £7.5 billion of the £25.6 billion total – equivalent to 29%.

It is worth noting that two of the top five are miners and one is a utilities company. In other words, despite the decline in mining sector payouts, they remain an essential stalwart of any income-generating portfolio.

Computershare explains: “Nine-tenths of the £2.6 billion decline in headline mining company dividends was driven by Glencore, which is preserving cash to fund its recent $6.9 billion acquisition of Canadian steelmaker Teck Resources.

“Lower profits from weaker commodity prices have played a role too and also explain lower payouts at Anglo American and Antofagasta.

“Rio Tinto will be the sector’s biggest payer this year – it held its dividend steady in the third quarter, reflecting stable revenues and lower costs, yielding profits more in line with pre-pandemic trends.”

Top five stocks

Note: Where the base currency is USD, dividend per share has been shown in the base currency with a GBP conversion also provided. The currency conversion also impacts the year-on-year change.

Should you invest in UK dividend stocks?

UK equities could still offer good opportunities for income investors, despite the fact that full-year dividend forecasts are now being downgraded.

In its quarterly report, Computershare says it expects total UK payouts to amount to £92.3 billion in 2024, including one-off special dividends. This would equate to an annual growth rate of 2% versus the 3.8% that was forecast previously.

Meanwhile, regular dividends (excluding one-off payments) are expected to come in at £86.8 billion, down 0.3% on last year.

Despite this, Computershare still expects UK equities to yield 3.7% over the next 12 months. Investors should note that this figure only includes dividend payments and does not consider any other form of cash returns.

The yield is significantly higher when you include these other factors. Earlier this month, AJ Bell argued that the FTSE 350 (FTSE 100 + FTSE 250) has an overall cash yield of around 7.7% when dividends, buybacks and takeovers are considered together.

For comparison, 10-year government bonds are currently yielding just over 4%, the UK base rate is 5%, and headline inflation is 1.7%. Against this backdrop, a 7.7% yield with the potential for capital growth on top starts to sound a little more appealing.

Going forward, Cleland thinks the outlook for UK dividend growth could look stronger, driven by developments in the oil and mining sectors.

“The conflict in the Middle East has already begun to drive oil prices higher. The range of possible outcomes from this is wide, but higher prices could boost profitability in the oil sector and potentially push up dividends in 2025,” he says.

“With the worst of the cuts in the mining sector likely now behind us, broad-based dividend growth from the rest of the market will be easier to see in 2025,” he adds.