Dividends will grow 5.1% in 2023 despite flat profits and high inflation, according to Henderson International Income Trust’s annual Dividend Cover report.
Total pay outs and share buybacks reached a record £2.29trn in 2022, up 25.4% from the previous year.
Overall, dividends grew four times faster than profits over the year. However, this year’s pay outs are not at risk with cover above the long-run average in 2023.
See also: Financials driving dividend growth as HSBC increases pay out
Ben Lofthouse, portfolio manager of Henderson International Income Trust, said: “Despite war, an energy crisis and soaring interest rates, dividends grew in 2022 and will grow again this year. Asset prices have been volatile, but dividends keep delivering and they remain very well backed by company profits.
“Some banks are now offering savings interest rates as high as 4.5% for the first time in over a decade, similar to the yield on many international income stocks. With fears of recession stalking the headlines, investors might be forgiven for questioning whether equities are worth the risk at all.
“But there is a big opportunity cost in fleeing to the perceived safety of cash. Not only does today’s high inflation ensure that savings are still relentlessly losing purchasing power, but stock prices typically turn strongly upwards when markets judge that the global interest-rate cycle has turned from hikes to cuts. Nobody knows exactly when that will happen, but when it does it will do so quickly, wrongfooting those who opt to sit on the sidelines.”
The overall cover was 2.4x in 2022, a decline from the 2.8x cover the year before. However, this was a historically high level distorted by the pandemic.
Companies entered 2023 with their dividends at their second highest level compared to profits since 2014, and above the long-run average.
Henderson International currently anticipate dividend cover to be 2.3x in 2023 despite the global economic slowdown.
Meanwhile, dividends are expected to grow 5.1% in 2023, while global profits are due to hit £315trn.
Lofthouse added: “Dividends are a critical piece of the puzzle. Of course, they mean real cash for investors year-in, year out, but the fact that they grow is the true key to building wealth. International dividends have more than doubled in the last 14 years and only fell during the 2009 recession and the first year of the pandemic.
“All other things being equal, sustainable annual dividend growth of a little over 6% on average would result in a doubling of the dividend income an investor received from their portfolio every 20 years. Moreover, if you reinvest your dividends you can grow your wealth exponentially over the long term.
“Dividend cover is a comfort blanket. If cover is good as profits grow, companies can increase the cash they hand back to shareholders. We expect to see global dividend cover above the long-run average this year so investors can feel reassured that the income on a diversified portfolio of international stocks like HINTs is well backed by real company profits.
“Moreover, if there is any attempt to preserve cash in the event of a more severe economic downturn, history shows that companies will strive to protect their dividends and instead target share buybacks to make savings.”
