Dividend record: the sectors responsible for income boom

Banks have driven a new record for UK dividends after big increases by the likes of NatWest Group (LSE:NWG) and Standard Chartered (LSE:STAN) accounted for four-fifths of all growth in the second quarter.

The sector upped its distributions by 20.6% to £11.1 billion as shareholders benefited from higher-for-longer interest rates, low loan losses and strong balance sheets.

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Mining dividends also rose by more than a quarter as higher prices for copper, silver and gold helped to fund a significant recovery from last year’s cyclical low, particularly at Antofagasta (LSE:ANTO), Fresnillo (LSE:FRES) and Endeavour Mining (LSE:EDV).

The weakest sector was food, drink and tobacco, which is normally a reliable stalwart of steady payouts but fell 15.9% due to a large cut by Guinness and Smirnoff firm Diageo (LSE:DGE).

Overall, 11 sectors out of 20 saw underlying growth as the latest edition of the Computershare Dividend Monitor showed the UK market distributed £35.3 billion in the three months.

The second-quarter record came despite a 76% slump in special dividends to £465 million, which compared with the average £2.2 billion over the last five years.

The popularity of special dividends has declined amid a marked increase in share buybacks, which have become the preferred mechanism for distributing surplus capital because they offer greater flexibility and can enhance closely watched per-share metrics.

Stripping out special dividends and foreign exchange movements, Computershare said regular dividends totalled £34.8 billion for a 7.4% increase on an underlying basis.

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The top payer for the fourth year in a row was HSBC Holdings (LSE:HSBA), followed by Rio Tinto  Ordinary Shares (LSE:RIO), NatWest, Unilever (LSE:ULVR) and Shell (LSE:SHEL). They paid £14.6 billion between them, which accounted for 41% of the total.

The next 10 stocks generated £9.4 billion or 26.6%, led by Lloyds Banking Group (LSE:LLOY) and followed in order by British American Tobacco (LSE:BATS), BP (LSE:BP.), Legal & General Group (LSE:LGEN), RELX (LSE:REL), Reckitt Benckiser Group (LSE:RKT), Standard Chartered, Aviva (LSE:AV.), Glencore (LSE:GLEN) and GSK (LSE:GSK).

HSBC was the biggest driver of growth in the banking sector after it raised its end-of-year dividend by 25%, funded partly by a suspension of its share buyback programme.

NatWest raised its payout by 53% through May’s distribution of 23p a share, while Standard Chartered increased by 75% and Lloyds Banking Group delivered a market-beating 14%.

The strength of the second quarter, which typically accounts for two-fifths of annual UK dividend payments, has prompted Computershare to increase its growth forecast for 2026 to 3.4%, from 3.1% previously. This implies regular dividends of £86.5 billion by the end of the year.

However, it added that median dividend growth of 2.8% in the second quarter pointed to an ongoing struggle for strong earnings momentum in a wide range of sectors and companies.

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Computershare said: “With dividend cover levels low by international standards, rising profits are the only route to sustainable dividend growth in the UK.

“We are seeing pockets of earnings strength – recently in energy, defence, banking and parts of the mining sector – but the domestic economy is the weak link, weighing on consumer-facing industries and housebuilders.”

It added that UK equities are trading on a forward yield of 3.2% over the next 12 months, with no difference between the top 100 and the mid 250 companies. This compares with the UK 10-year gilt yield at 4.8% and the best-buy cash savings rate of 4.2% for instant access.