The second quarter Link UK Dividend Monitor has revealed the high concentration risk facing UK income investors.

Three quarters of the dividend growth in the second quarter came from the mining, oil and  bank sectors.

Looking forward mining dividends, which have been the most significant driver of dividend growth during the last two years, may well have peaked.

UK dividends have also benefited from sterling weakness.

UK dividends had a very good second quarter.

The headline total jumped 38.6% year-on-year to £37 billion. Large one-off special payments were a key driver, but the underlying picture was strong.

Underlying dividends, which exclude volatile special dividend payments, jumped by 27% to £32 billion.

This was the second-largest quarterly total on record, for both headline and underlying figures, just shy of the all-time record reached in the second quarter of 2019.

STERLING WEAKNESS LIFTS DIVIDEND RETURNS

It is important to note that UK dividend performance was boosted by the weak pound.

In the second quarter, two fifths of the total dividends paid were denominated in US dollars, generating an exchange rate boost of £1.4 billion to their sterling value.

For the full year, the pound’s weakness is set to add £3.5 billion to £4.5 billion to the total.

In a recent in-house interview David Smith, manager of the Henderson High Income Trust (HHI), outlined the fund’s strategy.

The £266 million trust which is currently trading on a 1.5% discount to net asset value (NAV), invests in a prudently diversified selection of both larger and smaller companies.

It aims to provide investors with a high dividend income stream (the trust currently yields 9.08%), whilst also maintaining the prospect of capital growth.

The trust has the ability to own bonds and as Smith highlights ‘companies have to look after bond holders over equity holders’ which means bond coupons are more resilient than equity dividends.

Commenting on the Link report Smith said: ‘Although economic headwinds are building, UK companies generally have robust balance sheets while the rebasing of dividends during the pandemic has resulted in better dividend cover, hence companies are in stronger financial health to weather any potential slowdown, making current dividend levels for the UK market more sustainable.’

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