Tuesday 24 April 2012

How Reliable Are Dividends? (UK)

Dividends form a major source of income for the DIY Income Investor portfolio - representing Level 6 of the Income Pyramid. But they are only part of the strategy: although they often provide high yields, they are not always reliable. Companies have total discretion over whether or not they pay dividends as well as the level of the dividend.

So how reliable are dividends?

Of course, it depends - and the criteria the DIY Income Investor uses to select dividend shares should help to select the companies that are more reliable dividend payers. But you can't always be certain - BP is a case in point. Compared to their obligations in paying fixed-income debt, such as corporate bonds or preference shares, dividends are quite vulnerable.

The latest Capita Registrar's Dividend Monitor Report (dated January 2012) has some interesting numbers on dividend payments for the FTSE shares. The headline is:

Companies increasing payouts outnumber those cutting by 4.1:1, compared to 3.2:1 in 2010.

So, excluding payouts that remain the same (I guess), these numbers would suggest that the chance of your FTSE dividend share being cut (rather than increased) over the last two years was something like one-quarter to one-fifth! But that statistic is not quite right.

These are the more detailed figures for 2011:
  • 438 companies paid a dividend in 2011
  • 373 firms increased, started or reinstated dividends
  • 59 cut them, of which 31 companies cancelled their payments (either through bad performance or because they left the exchange e.g. via takeover, de-listing or failure)
  • (by a process of elimination I calculate that 6 did not change their dividend)

In other words, in 2011 presumably 65 (438-373) companies froze, cut or cancelled dividends - 14.8% (around 1-in-7) of dividend-paying companies.

Dividends are important. As the report notes:The latest Barclays Equity Gilt Study shows that £100 invested at the end of World War II would have been worth just £5,721 at the end of 2008 in nominal terms. Reinvest the gross dividends and the same £100 would have grown to £92,460.

We buy dividend-paying shares, principally for the income; their capital value does not usually increase significantly. However, crudely speaking, the risk of buying a dividend share of a company that commits the cardinal sin of freezing, cutting or ('gasp') cancelling their dividend is running at around 15%.

Does that seem high to you?

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. 15% might seem high if you buy shares without doing much research and then ignore their progress. In the current economic climate if you buy div paying shares you must always ask (imo) how sustainable the divs are and monitor their progress.

    Even at 15% do you not think that ordinary div paying shares offer better long term protection against inflation than bonds and fixed interest shares?

  2. I think in the current climate that would be pretty good. Still tacking into the headwind of a consumer recession, of course profits will be impacted. If only 15% are affected (and some of these will only be holds or reductions not cancellations) then that would not deter me at all.

  3. U.K. dividends payouts soared by 25% in the first quarter of 2012 to reach £18.8bn, according to the latest Dividend Monitor report from Capita Registrars, which analyses data provided by Exchange Data International.

    In total, British firms paid out £3.8bn more than the same period in 2011, making 2012 a record for the first quarter.

    The headline total dividend payout for Q1 was boosted by two very large distorting factors.

    Vodafone and Cairn Energy each paid out £2.2bn in the form of special dividends. Vodafone’s reflects the strong performance at Verizon Wireless, in which it owns a 45% shareholding, while Cairn was returning cash to shareholders on the disposal of assets in India.

    But will it last?

    Capita expects an acceleration in U.K. dividend payouts as the year progresses, providing the Eurozone doesn’t implode again.

    Capita has cut its underlying forecast growth rate to 8.2% for the full year to reflect the slower first quarter.

    Click Here: http://seekingalpha.com/article/518721-vodafone-s-mega-payout-u-k-dividend-payouts-totals-30bn-in-q1-2012 to finish reading this article.