With the yield on UK shares at a level not seen since the depths of the financial crisis, are investors missing a bargain?
- Dividends would have to fall by a quarter for the yield to reach their long-run average, far more than they fell in the financial crisis.
- FTSE 100 companies are expected to yield more than 5% in the year ahead.
- It was the cyclicals – banking and mining companies – that really flew this year.
The yield on UK shares has hit its highest level since March 2009, according to the latest Link Asset Services Dividend Monitor. This would normally be a sign of distress, it points out, yet dividends would have to fall by a quarter for the yield to reach their long-run average, far more than they fell in the financial crisis. Instead, it is perhaps a sign that the UK market is ripe for a correction.
This perhaps isn’t news. Asset allocators have long seen the potential for a rally in UK assets should the Brexit situation be resolved. However, it does provide a more compelling reason to invest even while the Brexit negotiations endure.
The Dividend Monitor showed that FTSE 100 companies are expected to yield more than 5% in the year ahead. With mid-caps yielding 3.3%, the average for the UK market is 4.8%. This compares to a 30-year long-run average of 3.5%. While the group does expect slower growth in 2019 - with underlying dividend growth of 5.3% - there are no signs of a slowdown in payouts. In particular, company earnings have held up well, leaving dividends on solid ground.
The group said: “If the UK or world economy does head into a recession in the next couple of years, that will feed through into dividends in due course, but for now, investors can take comfort from the solid income stocks are still providing. A slumping pound has provided an additional boost to investors earning dividends from the UK’s large multinationals too.”
Almost all sectors showed growth. The laggards were, predictably, the airline, leisure and travel industry, plus domestic utilities. It was the cyclicals – banking and mining companies – that really flew this year. The group pointed out that in the fourth quarter of 2018, the Royal Bank of Scotland paid its first dividend in ten years; in the second quarter, Standard Chartered paid its first dividend since 2015; and Lloyds is now distributing more than it did before the financial crisis. At the same time, the mining sector increased dividends by a punchy 66%, suggesting its worst days are behind it.
The latest report should give UK investors some cause for optimism amid the gloom. The group said: “If the world does sink into a recession in the next couple of years, or Brexit goes badly, the drop in dividends is likely to be in the 10-15% range, not at the levels currently implied by the market.”