The record of the second quarter in UK dividends, the total value of dividends paid by UK listed companies jumping 14.5% to £37.8bn. That was boosted by special dividends, which are less than reliable in an economic downturn, but underlying dividends still managed to post 5% growth. Remember though that past performance is not a guide to the future.
Healthy dividend growth might come as a bit of a surprise given what’s been happening with share prices lately. The FTSE All-Share is down 2% since the start of the second quarter and newspapers are full of economic doom and gloom.
But while share prices have slipped, profits have remained stable or even been growing. And because dividends are generally a function of profits, they’ve climbed too.
The result is that the FTSE All-Share now offers a prospective yield approaching 5% according to Bloomberg compiled consensus, although this is not guaranteed.
Yields are variable and not a reliable indicator of what you might get in the future. The value of all investments and income can rise and fall so you could get back less than you invest.
Why are share prices down when profits are up?
Share prices usually reflect investors’ expectations of what will happen in the future. That makes sentiment the key driver of share prices in the short term. If investors think a company’s outlook is bright the share price should rise, if not it should fall.
With international investors worried about what Brexit could mean for UK businesses it’s perhaps no surprise the UK is one of the most unloved markets in the world at the moment. when markets wobble, dividends are king In this kind of environment, dividends tend to make for a far more reliable source of return than share price growth.
Dividends are driven by underlying business performance, rather than investor sentiment. They therefore don’t typically fluctuate as much as share prices although there are no guarantees.
There’s also a raft of evidence showing reinvesting dividends can work well for investors’ returns over the long term.
When share prices are low, dividends can be reinvested at a higher rate of return – although the value of those investments will still rise and fall.
This article is not personal advice. If unsure of a course of action for your circumstances, please seek advice.
Shadrach is a Trending Journalist. His first job was as a newsreader and journalist at an award winning magazine. He spends most of his time scouring the internet for the hottest topics to share with his readers.