Investors have shown a marked preference for global equity income over UK equity income in recent years, but the latest dividend statistics should prompt a rethink.
- The latest Computershare Dividend Monitor saw UK dividends rising at 5.4%
- The FTSE All Share has a yield of almost 4%, compared to just 2% for the FTSE World
- The size of the equity income sector has decreased from £58.9bn in 2016, to just £34.7bn today
In the general gloom that has settled over the UK equity market in recent years, it is easy to forget that it remains a great source of high and growing dividends. The latest Computershare Dividend Monitor saw UK dividends rising at a brisk 5.4%, led by a resurgent banking sector. Should investors rethink their preference for global equity income funds?
In the fourth quarter, UK dividend growth was an even punchier 15.6%. HSBC fully restored its quarterly payouts for the first time since the pandemic and regained its position as the UK’s largest payer. Computershare forecasts a strong 2024 ahead, with higher special dividends driving headline growth of 3.7%.
The UK market also compares favourably with its peers. The FTSE All Share has a yield of almost 4%. This compares to just 2% for the FTSE World and just 1.5% for North America. Only large cap European equities come close, with a yield of 3.2%. The UK market appears to offer a high and growing yield, at a lower price, than almost anywhere else.
This is important because investors have moved away from the UK for dividends in their droves. The size of the equity income sector has decreased from £58.9bn in 2016, to just £34.7bn today, sliding from the 5th to the 10th most popular sector. The global equity income sector appears to have been the main beneficiary, having jumped from £14.4bn to £22.8bn.
The reasons have been well-documented. UK equity income is seen as concentrated in a handful of sectors, most of them stodgy ‘old economy’ areas such as energy and mining. There have been problems in areas such as banking, which have hurt some of the major dividend payers. Perhaps most important factor has been the persistently poor sentiment towards the UK.
However, the sector is still home to some talented managers, who are increasingly exasperated that investors don’t recognise the value in their part of the UK market. They see increasingly vigorous attempts to improve these valuations: James Lowen, senior fund manager, J O Hambro UK Equity Income fund, says: “In respect of boardroom frustrations around low UK equity valuations, a notable trend is emerging, with companies resorting to share buybacks to address the challenge. This is particularly evident in sectors such as banking, where buybacks are being extensively used.” He believes this is likely to amplify dividend growth over the long-term.
The UK equity income sector still has some drawbacks. It is still skewed to certain sectors, and those sectors are generally unexciting. However, in terms of cheap dividend growth, it is tough to beat.
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