The Quest for Income: Dividends ‘Supercharge Returns’
With interest rates remaining low and falling bond yields, investors have turned to equities in search of income and according to data collected by outsourcing firm Capita Assets Services, UK’s listed companies have responded by returning £1 trillion of dividends since 2000.
Analysts expect dividends to deliver a 7% increase on 2017, the eighth consecutive year of dividend growth in the blue-chip index, outstripping both inflation and economic growth.
With interest rates remaining low and yields on some UK government bonds turning negative, it is desperately difficult for investors to achieve income but those taking the additional risk of investing in equities since the turn of the millennium have been rewarded.
In 2000 listed firms paid out £42bn but this has risen rapidly over time, and is forecast to hit £88.5bn in 2018.
Capita predicts that a total of £2 trillion in dividend payments will be reached well within the next decade; the lion’s share of the growth in dividends is from financial firms with RBS, Standard Charter, Barclays and Lloyds in the vanguard.
Other sectors are also expected to play their part in boosting the overall yield of the index to 4.3% this year at current share prices, up from around 4% in 2017.
With inflation as measured by the Consumer Price Index (CPI) remaining ahead of the Bank of England’s target at 2.3%, this is welcome news for investors, particularly those on fixed incomes.
Justin Cooper, chief executive of Capita’s shareholder solutions business highlighted how important dividends were to investors.
‘They are the most important component of returns from investing in shares over the long term. The FTSE All Share index is 40% higher now than it was at the beginning of the century and reinvesting all those dividends will have supercharged an investor’s returns.’
Investors have increasingly turned to the stock market to boost returns on their savings as inflation picked up as a result of the decline in the value of the pound since the vote to leave the EU.
Whether you are investing for growth or income, you should include dividend paying stocks in your portfolio as the power of compound interest means that reinvested dividends can help grow your savings at a far faster rate than capital growth alone.
Income-paying assets are important when in the accumulation stage of building a pension pot when it is important to maximise contributions and thanks to compound interest savings made early on have the most impact; for those in retirement, dividend-paying stocks can provide an income meaning you do not need to drawdown on your capital, and threaten your future financial health.
‘With interest rates and bond yields low, income seekers have increasingly turned to shares in recent years to provide for their needs. Indeed, it is unlikely that alternative asset classes will see their yields match equities in the near future,’ said Mr Cooper, ‘Savers increasingly responsible for their own prosperity in retirement must look beyond low earning savings accounts if they are to accumulate enough money by the time they retire. Asset managers must likewise help their corporate clients meet ballooning pension liabilities.’
Investors’ returns are heavily dependent on several enormous companies; in 2018 just 10 stocks are forecast to account for 55% of all dividends in the FTSE 100. Oil giant Royal Dutch Shell alone will account for 13.5% of payouts
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