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Spend & Save

Derek Pain: Dividends rise as directors remember the shareholders

No Pain, No Gain

Dividends are becoming increasingly important in these low interest rate days. With banks and building societies offering pathetic returns the attraction of some stock market constituents has probably never been greater. And, it is not only the shares of small, perhaps even dubious, companies that provide eye-catching yields. It is not uncommon for elite members of the blue chip Footsie index to produce returns of about 4 per cent and in some cases rather more.

At one time it was not unusual for some highly profitable companies not to bother with dividends. Cash was ploughed back into the business, thus enhancing the share price. Such an attitude wins little support today.

Indeed, many quoted operations seem to be doing their best to hike dividends. In the third quarter of this year, payments reached £20.1bn, nearly 16 per cent higher than the corresponding three months last year. Forecasts for 2011 have been lifted to £67bn, an outlay that would eclipse the past two years. It is not inconceivable that this year's cash distribution could, based on current values, hit a new high.

Capita Registrars, which sponsored the research, said all stock market sections increased payments in the third quarter. The registrars' Charles Cryer observes: "Dividends are growing faster than we expected as UK firms shrug off the worst stock market conditions since 2008 and continue to increase payments to shareholders".

This dividend round is not a short-term fluke, although allowing for inflation there is some way to go in real terms to achieve a record level. But Rob Burgeman at stockbroker Brewin Dolphin, which manages £25bn of funds for 130,000 private clients, has researched the dividend phenomenon and concludes that "income returns have been surprisingly consistent over the past 10 years".

Using Footsie and an index linked to the Association of Private Client Investment Managers and Stockbrokers, he says that since 2002 an income portfolio has produced a total return of 5.6 per cent and an income reward of 3.7 per cent. What is described as a balanced portfolio (containing a much larger proportion of equities) achieved a total return of 5.9 per cent with income at 3.2 per cent.

Mr Burgeman points out that income has held up well in the last few years when interest rates collapsed and returns from bankers – once representing 26 per cent of Footsie dividends – subsided. Oil giant BP, during the same period, for a time cut out payments due to the Gulf of Mexico explosion.

He says many blue chips have achieved incredible dividend growth. He cites Glaxosmithkline where dividends per share have risen from 43.33p in 2002 to 74.44p this year. And unit trusts and the maligned investment trusts have proved to be "useful investments".

Mr Burgeman says diversification is the key. "Putting all one's eggs in one basket is a dangerous course of action. But a well-balanced approach can pay dividends, over the longer term".

Some Footsie shares offer yields exceeding the 5.2 per cent inflation rate. They include insurers Aviva and Standard Life and utility Scottish & Southern Energy. Glaxo's yield is 4.9 per cent. The all-share index returns more than 3 per cent, comfortably covered by earnings. And inflation, providing it is not too prolonged, is not necessarily bad for equities. As Paul Mumford of Cavendish Asset Management says, high inflation can make shares more attractive compared to fixed interest assets. It also gives some businesses the opportunity to adjust prices in their favour.

The no pain, no gain portfolio is not an income exercise and dividends are excluded from quarterly performance calculations. But I am delighted when constituents produce sharp increases. So step forward Avation, the fully listed aircraft leasing group that I inadvertently described as AIM-traded two weeks ago. It has lifted its dividend by 66 per cent to 1p a share and chairman Robert Chatfield says the company's directors "overwhelmingly recognise the importance of rewarding shareholders", a sentiment, I often feel, is not fully accepted in some boardrooms. The group's pre-tax profits jumped from £3,548,000 to £5,632,000 with the net figure up 120 per cent to £3,627,000. Earnings per share rose 87 per cent to 11.95p. The shares are about 107p against an 83.5p recruitment price.