The UK market is a fertile hunting growth for dividend investors, but it could be worth looking beyond the FTSE 100.
- Payouts from UK companies have risen 11.2% year on year to an all-time quarterly high
- The FTSE Small Cap yields 4.1% versus 3.2% for the mid-caps and 3.7% for large cap
- Over the past three months the FTSE Small Cap index is up 9.2%
Amid a stronger run for the UK market, companies are also showing healthy rises in dividends. Payouts from UK companies have risen to an all-time quarterly high of £36.7bn, up 11.2% year on year. It should remind investors of another one of the appealing features of the UK market.
The Q2 2024 Dividend Monitor report showed that while underlying growth was an anaemic 1% as mining companies cut their payouts, a range of special dividends boosted overall payouts. These included HSBC, which distributed the disposal proceeds from its Canadian business. The banking sector made the largest positive impact on dividends, distributing £1.1bn more than for the same period last year.
The dividend growth was broad-based, with 16 out of 21 industry sectors seeing higher payouts. Dividends are also broadly spread across small, medium and large cap companies, with the FTSE Small Cap yielding 4.1% versus 3.2% for the mid-caps and 3.7% for large cap.
The mining sector has been the one notable weak spot, and it continues to weigh on overall dividend growth. For example, Glencore cut dividends more than expected in the third quarter. Excluding mining companies, the forecast would show double-digit underlying growth in dividends for this year.
Mark Cleland, CEO of issuer services, UCIA at Computershare, said: “Higher profits mean most sectors are paying more in dividends and spending a lot of cash on share buybacks, although this might not be obvious given that the gravitational pull of mining companies on UK dividends is hard to escape. Our figures for Q2 show that most sectors are delivering growth, and we expect that to continue in the second half of the year.”
The strength of dividend payouts is another reason to look again at the UK market. The closest market in terms of yield is Europe, but even there, the FTSE Europe All Cap index yields 3.1%, significantly below its UK equivalent. The only market that outpaces the UK on dividends is Latin America (at 7.2%). The FTSE World yields just 1.8%.
Within the UK, it may be worth leaning into the recovery in smaller companies. Over the past three months the FTSE Small Cap index is up 9.2%, almost keeping pace with the S&P 500. After a long time in the wilderness, this might finally represent a turning point for the UK’s smaller companies. Income-generative small caps tended to be at the lowest risk end of the market, and may be a more comfortable way to dip a toe back in the market.
