Depending on dividends
David Prosser on the importance of dividends for overall returns.
UK companies distributed £14bn worth of dividend payments during the first quarter of the year, new data just released by Computershare reveals. Strip out the distorting effects of special dividends and that figure was pretty much in line with the same period of 2024, when investors in UK companies received just 0.2% more.
It’s a timely reminder of just how important dividend income is to stock market investors. Indeed, looking only at constituents of the FTSE 100, dividends have delivered more than half the total returns generated by the index over the past two decades.
Moreover, these cash flows look especially valuable during periods when other sources of income are drying up. Like now, for example, with the Bank of England’s Monetary Policy Committee in interest rate reduction mode; the next cut in rates may come as soon as this week.
Dividends have delivered more than half the total returns generated by the index over the past two decades.
David Prosser
Computershare’s analysis makes the point that most companies work hard to maintain or increase their dividends, even though their profitability may vary from one year to the next. They recognise the importance of steady income growth to their shareholders.
That, of course, is a concept that is also well grasped in the investment trust sector, which makes good use of its unusual attributes in this regard. The fact that investment trusts – uniquely, among collective investment vehicles – are allowed to retain some of the dividend income they earn on their portfolios each year enables them to supplement payouts to investors during leaner periods.
This smoothing effect is hugely reassuring to anyone who depends on their investments for income. It is also what has enabled the dividend heroes, as the Association of Investment Companies (AIC) terms an elite group of investment trusts that has raised dividends every year for at least 20 years, to produce the goods even during the most challenging of periods.
The good news is that on dividends at least, this doesn’t look to be one of those challenging periods, despite all the noise around political and economic disruption. In fact, Computershare has just raised its forecast for 2025’s total dividends. It now thinks UK companies will pay £85.6bn worth of ordinary dividends this year; that would be 1.8% more than in 2024.
For now, at least, many UK companies appear to be managing to maintain strong balance sheets and good levels of dividend cover. That provides the foundations for resilience of income distributions over the next year or so even in the face of global uncertainty.
More dividend growth will also be helpful for investment trusts looking to build on their own records of dividend consistency. Many funds will take the opportunity to further bolster their dividend reserve funds, providing an additional cushion against more challenging times when they inevitably arrive.
It’s worth pointing out that investment trusts won’t always pay the highest incomes, even when dividends across the market are rising. When funds choose to hold back some income in reserve, they inevitably pay out less than might otherwise have been possible. Rather, the appeal of investment trusts is typically consistent and dependable income – and for many investors, that’s what matters most.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
