Derek Pain: 'The collapse in dividends could have worrying consequences'

Profits are under severe pressure - already a number of top shares have killed off payments, or cut the amount they are prepared to distribute to shareholders

The threat to dividends appears to be growing. I realise many small shareholders rely on the trickle of cash from their investments but big players, particularly pension funds, are also grateful for equity income.

Last week I touched upon the slump in dividend cover - the guide to the affordability of cash distributions. According to one calculation, cover for the top 350 shares is down to 1.2 times, compared with 1.5 a year ago. Such a decline, which could be much worse if the rest of the stock market were included, could have serious implications. Some fund managers look for at least two times cover.

In many instances, profits are under severe pressure. Already a number of top shares have killed off payments, or cut the amount they are prepared to distribute to shareholders.

And more will be forced to follow this retrenchment, which has already ensnared such widely different companies as Tesco, Britain's biggest retailer, and Glencore, the mining giant. Hitting dividends indicates that few companies are prepared to dip into reserves to bolster payments.

The increasing dividend threat could undermine the stock market, which is already suffering from evidence of the looming payments squeeze and the seemingly continuous array of profit warnings. It looks as though many shares are in for a difficult time.

The No Pain, No Gain portfolio has never pretended to be an income play. I have always regarded dividends as welcome additions but the thrust of my little share exercise has always been towards capital appreciation.

Indeed if I had bothered to include dividends in my quarterly calculations, the portfolio's profit would, I believe, exceed £200,000. Don't forget that at times it included such high yielders as brewer Scottish & Newcastle and Printing.com, now called Grafenia.

So in an income sense I am not too perturbed by the collapse in cover. But its implications for capital appreciation are worrying. About half of my selected shares are on the dividend list – the rest are unlikely to reward shareholders through distributions for some time, although I remain hopeful they will prosper and achieve varying degrees of capital appreciation.

I do not see my two star performers, Booker, the cash- and-carry chain, and Whitbread, the hospitality giant, experiencing dividend curbs. Indeed Booker has already promised that in addition to its final dividend, shareholders will collect a 3.5p special payment, making it three years in a row in which such extra distributions have been declared.

The investment house Investec has a 205p target price on the shares against a near peak of, as I write, 179p. And Whitbread is thought to be trading satisfactorily and has a progressive payment policy.

Among other dividend payers are Avation, Lloyds Banking Group, Marston's and Peel Hotels. Patisserie has promised a maiden payment with its annual figures and dividend-paying Interserve has provided reassurance that year's figures are in line with expectations.

Avation, an aircraft leaser, has revealed that the Chinese airline involved in a lease deal is Shenzhen, a subsidiary of Air China, one of the largest Chinese airlines. It has also fixed up a deal to take on a leased aircraft with Air Berlin. It now embraces 11 carriers.

The group continues to grow. Average monthly lease revenue this year is $5m (about £3.3m), but from next March, helped by other deals coming into fruition, monthly revenue will be more than $7.5m.