Europe tops the tables, followed by Sector Specialist: Commodities and Natural Resources
Last year was a disappointing year for company dividends, the suspension of BP's dividend being a case in point. The investment company sector was well placed to weather the storm because of its freedom to build up revenue reserves for a rainy day, and a number of AIC members are this year reporting strong income growth in their portfolios. Despite this, there has been much speculation about the prospects for dividends, particularly given the problems in the Eurozone.
With that in mind, the Association of Investment Companies (AIC) has published figures showing which sectors and companies have seen the fastest annual dividend growth over the last 5 years (see table on page 2). Dividend growth should not be confused with the highest dividends and some of the annual dividend growth is from a low base. An exception is the Global Growth & Income sector, which has both one of the highest sector average dividend yields at 4.4%, and has also seen some of the strongest dividend growth over the last five years.
But growing dividends can be associated with corporate health. Interestingly, the Europe sector has seen the highest annual dividend growth per year over the last 5 years, with a 20.5% annual dividend increase. This is followed by Sector Specialist: Commodities and Natural Resources, UK Smaller Companies, Asia Pacific Excluding Japan and Global Growth & Income. What is the outlook for company dividends?
Stephen Macklow-Smith, Manager, JPMorgan European Investment Trust said: "The fact that Europe has seen the fastest dividend growth shows that the volatility caused by the Eurozone crisis is masking the truth that European companies are in an excellent globally competitive position with strong balance sheets. They are currently trading at attractive valuations and with the Euro trading at highly competitive exchange rates these companies are benefiting. We expect to see news around European dividends remain positive."
Hugh Young, Manager, Aberdeen Asian Income Fund Limited said:
"The Asian financial crisis of the late 1990s was very painful for many Asian companies, particularly those that had invested wildly with borrowed money in the years prior. But it also served to change the culture of Asian firms, helping them to focus more on balance sheet strength as well as generating returns on investment in excess of the cost of capital. As a result, debt to equity ratios have fallen since the late-90s and returns on capital have risen. This has meant rising earnings and, with payout ratios at around 40% - higher than many advanced markets - rising dividends too. As for what the future holds, Asia is gradually decoupling, meaning that it is shedding its dependence on the West for exports and capital. This should provide growth opportunities for Asian companies as well as the confidence for them to continue to reward shareholders."
Patrick Edwardson, Manager, Scottish American Investment Company (SAINTS) said:
"We expect dividends to rise. The corporate sector is in very good shape with strong balance sheets and cashflows. So long as the global economy continues to grow, then this strength should support rising payouts from companies.
"The economic and political picture in individual countries will always be uncertain and the difficulties facing Europe and some other developed economies are significant. But growth elsewhere in the world is strong and that means many companies can still look forward to rising sales and good profits. What's more, a lot of companies have spent the last few years building up cash reserves and reducing their reliance on borrowed money. Because of this, they should be able to withstand short-term economic headwinds and set their dividends to reflect long term prospects."
Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: "Dividends are a crucial component of equity investment, and investors will be following dividend growth closely, particularly in these low interest rate, inflationary times. The investment company sector occupies a privileged position when it comes to growing dividends. Some sixteen investment companies have consistently raised their dividends each year for over 20 years with several investment companies breaking the 40 year mark.
"Investment trusts can retain up to 15% of the income they receive each year and transfer this to their reserves. These retained dividends are transferred to the revenue reserves and are used to boost dividends in difficult years. Known as ‘smoothing' dividends, this is one of the defining characteristics of the sector."
Sectors with the highest average dividend increases (% per annum)
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