As Capita Asset Services pointed out in its January UK Dividend monitor, while its preliminary forecast for 2016 was for £89.8bn worth of dividends, between October 2015, when it was made and January 2016 £3.4bn of cuts had already been announced and “the outlook has darkened markedly”.
So much so that the firm now expects underlying dividends to fall 0.9% in 2016 to £83.8bn this year, the first decline since 2010.
And, Capita is not the only firm wary of further falls. Neil Woodford, manager of the CF Woodford Equity Income Fund said at a recent dinner that he remains sceptical of the sustainability of dividends in the UK market, particularly those of BP, Shell and HSBC.
Hugh Yarrow, manager of the Evenlode Income Fund, agrees that the dividend outlook for the overall UK market is not good.
“Several large constituents have announced reduced or cancelled dividends (Centrica, Sainsbury, Tesco, Glencore, Anglo American, Standard Chartered etc.) over the last year and there is a risk that dividends in the commodity and energy sector may continue to melt away.
“At an aggregate market level, dividends may therefore fall quite a bit over the next year or two,” he added.
While the poor outlook for dividends is an issue for investors generally, it is of particular concern for those equity income managers that remain in the IA Equity Income sector, because if they want to stay in the sector they must adhere to its strict yield target of 110% of the FTSE All Share yield.
And, while it is definitely still possible to achieve such a target, a poor outlook for dividends means that forcing the issue could lead funds to chase high current dividend yields at the expense of good companies.
