In a remarkable display of resilience, the UK stock market has delivered unprecedented dividend payouts, reaching £36.7 billion in the second quarter of this year. This 11.2% year-on-year increase underscores the market’s strength and attractiveness to income-focused investors. 

However, the question remains: Can this impressive growth be sustained?

Special dividends drive surge

The record dividend payouts were significantly influenced by one-off special dividends, as highlighted by Computershare’s quarterly dividend monitor. 

Excluding these special dividends, the underlying growth rate stands at a modest 1.0%, with regular payouts hitting a new high of £32.5 billion. 

This growth coincides with the FTSE 100 reaching new peaks, although it still trails its US and global counterparts.

Since 2016, UK equity funds have experienced outflows of nearly £55 billion as investors seek better opportunities elsewhere. 

This raises concerns about the sustainability and future performance of UK valuations in a global context.

Sector-specific drivers of dividend growth

Several factors contribute to the surge in UK dividends, including a healthier economy where wages are outpacing prices, leading to increased consumer spending and higher corporate profits. 

Mark Cleland, CEO of Issuer Services at Computershare, notes that most sectors have reported higher profits, boosting dividends and share buybacks.

Banking stocks have been particularly influential, driven by record profits in 2023 due to higher interest rates. 

For example, HSBC announced a special dividend of 16.7p per share following the sale of its Canadian arm, significantly impacting the quarter’s figures.

The healthcare sector also contributed notably, with strong performances from companies like Haleon and GlaxoSmithKline. 

Other sectors showing growth include insurance, property, industrials, and food retail, while high oil prices have supported modestly rising dividends from major oil companies.

Conversely, the housebuilding sector has struggled due to high interest rates, though optimism remains for recovery as rates decrease and government initiatives boost construction. The mining sector has also dragged on overall dividend growth, with significant year-on-year cuts.

Future outlook for UK dividends

Looking ahead, the rate of dividend growth is expected to slow, primarily due to ongoing pressures in the mining sector. Glencore’s larger-than-expected cut to its third-quarter dividend exemplifies this trend. 

Consequently, Computershare has downgraded its full-year dividend growth forecast from 1.5% to just 0.1%, projecting regular dividend payouts to total £88.2 billion for 2024.

Excluding the mining sector, the UK market could see double-digit underlying growth. Other factors, such as potential interest rate cuts, could also influence the dividend landscape. 

Lower interest rates might reduce the pressure on companies to maintain high dividend yields, allowing more resources to be directed towards growth and expansion.

Evaluating the UK market for income investors

Despite the anticipated slowdown in dividend growth, the UK market remains attractive for income-focused investors. 

The FTSE 100’s current yield of approximately 3.6% compares favorably to the S&P 500’s 1.3%, highlighting the UK market’s potential for income generation.

Several factors contribute to this disparity, including the relatively low valuation of UK stocks and their concentration in mature industries such as financials and commodities. 

In contrast, the US market’s strong tech bias often leads companies to reinvest surplus capital rather than paying out dividends.

Investors should consider overall returns, not just income potential. The S&P 500’s growth of over 16% year-to-date significantly outpaces the FTSE 100’s 5.5% increase. 

While the UK market appears undervalued, its future performance remains uncertain. A diversified investment approach across different regions may be the best strategy to balance income and growth potential.

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