According to the latest Dividend Monitor report from Computershare, which looks after the share registers of 900 companies, total UK corporate dividend payments fell 4.6% or £700 million in the first quarter of this year to £14 billion.

The decline was mainly due to lower one-off special dividends and a handful of large cuts from firms such as Burberry (BRBY) and Vodafone (VOD), which halved its payment to prioritise spending on infrastructure instead.

THE DIVIDEND LANDSCAPE

On an underlying basis, ordinary dividends were down 0.2% in the first quarter to £13.6 billion, which was better than anticipated (Computershare had forecast a 2.7% decline) but well behind the 5% to 6% run-rate at the global level.

As well as fewer one-off payments, another factor behind the headline fall was share buybacks.

Oil major Shell (SHEL) paid its dividend on 6% fewer shares than a year ago, which more than offset the 4% rise in its pay-out, while banks such as Barclays (BARC) and NatWest (NWG) were also avid buyers of their own shares last year.

In total, companies bought back just over £63 billion worth of shares in 2024, up £3.5 billion on 2023, with a marked acceleration in activity in the second half of the year, including purchases by heavyweight firms such as Prudential (PRU) and Unilever (ULVR).

Adding together buybacks and dividends, total shareholder returns in 2024 were £153.4 billion, up from £148.5 billion the previous year.

SPECIAL PAYOUTS AND FX

Special dividends fell by 54% in the first quarter to £417 million, and it is likely they will continue to fall this year given two of the biggest payers now face considerable headwinds to their businesses.

Primark owner Associated British Foods (ABF) is one of the biggest payers of special dividends, distributing just under £200 million in the first quarter, the largest of three one-off payments in the last four years, but the firm recently cut its full-year outlook which suggests additional special payouts will stop for now.

Similarly, B&M European Value Retail (BME), which distributed £151 million in the first quarter, its sixth special payout in five years, downgraded its outlook at the start of 2024 sending its shares skidding to a five-year low and putting paid to hopes of a seventh payment.

The strength of sterling against the dollar is also likely to be a headwind to higher regular or one-off dividend payments, as when translated back into pounds any profits from the US in particular will have shrunk noticeably.

The report suggests if sterling holds its current level of $1.33 for the rest of this year, it will reduce the value of UK dividends by around £900 million with the biggest impact likely to be felt this quarter.

LARGE-CAPS OUTPACE SMALL-CAPS

First-quarter dividends at FTSE 100 companies were up 2.5% on an underlying basis, while payments by mid-cap FTSE 250 companies were down a whopping 28% on last year.

However, once again the devil is in the detail: half of the increase in the FTSE 100, and therefore half of the decline in the FTSE 250, was due to dividend-paying stocks like Alliance Witan (ALW), Games Workshop (GAW), Hiscox (HSX) and LondonMetric Property (LMP) being promoted from the mid-cap index to the large-cap index last year, while Bellway’s (BWY) decision to cut its payout accounted for around 10% of the 28% drop.

Another factor behind the disparity between large-caps and small- and mid-caps in the first quarter was the role of big healthcare companies, who were not only the biggest payers but raised the size of their payouts into the bargain.

‘When a large sector also posts strong dividend increases, its contribution to the total market increase can be very significant,’ points out the report.

Healthcare companies contributed £3.2 billion to the total in the first quarter, £228 million more than last year, after AstraZeneca (AZN) raised its dividend for the first time in more than a decade due to strong growth in revenue and earnings from its oncology and radiography drugs.

Similarly, GSK (GSK) raised its dividend although as the report points out it still only distributes around half its free cash flow.

The largest negative impact came from Vodafone’s cut, as previously flagged, and the reduced share count at BP and Shell which between them spent £19 billion on buybacks last year or half as much again as they paid in dividends.

WHAT ABOUT THE OUTLOOK?

‘Following a better-than-expected first quarter, the prospects for the second quarter also look brighter, led by banks and food retailers,’ says the report.

However, this optimism is qualified: ‘Later in the year, we are a little less optimistic than before as the strength of the pound (if it persists) weighs on the sterling value of dividends paid in US dollars.’

Weighing all this up, underlying growth for 2025 is now set to be 1.8% on a constant-currency basis, up from a previous forecast of just 1%, meaning regular dividends of £85.6 billion, but headline growth will be held back by the exchange rate so total dividends will be flat at £90.1 billion.

In an interesting wrinkle, the departure of companies from the UK market last year – either due to takeovers or the decision to move their listing overseas – will cost investors around £5 billion in lost dividends this year.

To put the dividend outlook in perspective, based on prices at the end of the first quarter the UK equity market offered a prospective 12-month yield of 3.7% compared with a return of around 4.6% on 10-year government bonds and interest rates of 4.5% to 5% on easy-access savings accounts.

WHERE CAN I FIND HIGH INCOME?

Leaving aside funds and trusts for now, the highest dividend yields in the FTSE 350 universe tend to come from small energy companies, with Energean (ENOG), Harbour (HBR) and Ithaca (ITH) indicating payouts of between 12% and 15% over the next 12 months, according to Sharescope.

A more reliable source of income is likely to be financials, however, with asset managers Aberdeen (ABDN) and M&G (MNG) indicating yields of 9.3% and 9.5% respectively, and big insurers Legal & General (LGEN) and Phoenix (PHNX) indicating yields of 9.1% and 9.2% respectively.

In terms of trusts, despite their new-found popularity, or perhaps because of it, renewable energy funds are high on the list of dividend payers, with Bluefield Solar Income (BSIF), Foresight Solar (FSF), Greencoat UK Wind (UKW), NextEnergy Solar (NESF), SDCL Energy Efficiency Income (SEIT) and The Renewables Infrastructure Group (TRIG) indicating yields ranging from 9% up to 13.8% at current prices.

Interestingly, in the AIC’s (Association of Investment Companies) UK equity income sector, very few trusts have yields approaching those of the financial, renewable or traditional energy companies.

Only CT UK High Income B (CHIB) and Chelverton UK Dividend (SDV) pay double-digit yields, with the average just 4.1% and half a dozen trusts paying less than that including well-known names such as Finsbury Growth & Income (FGT) and Temple Bar (TMPL).

Disclaimer: The author owns shares in Legal & General, NextEnergy Solar Fund and Phoenix Group.

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