Investing for income: Boost for DIY investors as FTSE 100 companies return £88.6 billion
After years of below inflation returns on their savings, an increasing number of people are turning to the stock market in search of income; that is fuelling a dividend bonanza as many of the country’s top companies have responded by boosting dividend payments to shareholders.
Research conducted by investment platform AJ Bell on behalf of The Mail on Sunday shows 2018 is on course to be a record one for dividends – with FTSE 100 companies delivering £88.6 billion of dividends; it predicts that next year could be even better.
In its report, AJ Bell combined actual dividends paid out by FTSE 100 companies this year with forecasts from leading City analysts and calculated the annual dividend payment that each of them is likely to pay this calendar year.
‘2018 is on course to be a record one for dividends’
Household names such as oil companies Royal Dutch Shell and BP, insurers Legal & General and Prudential and banks Barclays, HSBC, Lloyds and Royal Bank of Scotland, are joined on the list by less familiar names such as packaging group Mondi and Chilean copper mining group Antofagasta.
Not all of the top 100 companies generate their profits in the UK, so their ability to pay out to shareholders is an indicator of the health of the global economy rather than just the UK.
The report compared forecast dividend payments for this year with the actual dividends that each company paid last year; it then combined analysts’ forecasts to predict what investors might expect in 2019.
Here are some examples of its findings:
Source – AJ Bell
The entire table can be found at thisismoney.co.uk/divibonanza
Its figures give an estimate of the 2018 dividend payment as well as that in 2017; dividend yield is presented year on year as well as the likely income a £5,000 investment in each company would have yielded.
AJ Bell’s research suggests that the stock market’s 100 biggest companies will return a record £88.6 billion in 2018, a year on year increase of 8.6%; it predicts that the dividend pot for 2019 will reach £92.7 billion, a further 4.6% increase.
The 2018 figure represents a 79% increase since the global financial crisis; combined dividend payments by FTSE 100 companies in 2007 totalled just £49.6 billion.
AJ Bell calculates that 82 of the top 100 companies will increase dividends this year with 14 cutting them and 4 keeping payments flat; in 2019 it predicts 86, 10 and 4 respectively.
A host of household names such as Barclays, Tesco, LSE, Rightmove and TUI are delivering double digit hikes and RBS has indicated that a planned special dividend might be paid worth 39p per share.
‘a 79% increase since the global financial crisis’
The average dividend yield this year across FTSE 100 stocks is 4.1%, compared with 3.8% in 2017, and the forecast 4.3% forecast for next year; with inflation at 2.5%, investors are able to see an increase in the real rate of return on their money.
In announcing its results, Russ Mould, investment director at AJ Bell, identified the factors driving dividend growth.
Firstly FTSE 100 companies are performing very well as witnessed by the succession of record stock market valuations and higher profits usually mean higher dividends as investors – including influential and strident institutional shareholders – demand extra income to boost their portfolio returns.
Combined profits are forecast to reach an all-time high of £223 billion, which eclipses the previous peak of 2011 achieved because of the booming profits from the drillers and diggers.
Companies are also under pressure from shareholders to spend profits efficiently; with low interest rates, once debts and taxes have been serviced companies are increasingly returning excess capital to shareholders via dividends and share buybacks.
Mr Mould explained that if companies do not respond in a positive way, the consequences can be extremely painful, leading to ‘activist’ investors demanding drastic change – a business restructuring or a change of management.
Dividends are a key source of return for stock market investors; Hargreaves Lansdown has calculated that an investment of £10,000 in the FTSE 100 index ten years ago would now be worth £13,751 without dividends factored in – but £20,095 if they had been reinvested.
Current dividends also look attractive against other asset classes such as ten-year Government bonds that are yielding 1.5% and cash. Also, there is a strong correlation between firms that grow their dividends consistently and stellar overall returns for investors – both share price increases and rising dividends.
If AJ Bell’s analysis is correct, barring any as yet unforeseen severe downturn, it appears that those turning to the stock market for income can hope to achieve inflation busting returns at least for the foreseeable future.