Energy sector drives record global dividends, but a slowdown looms

Companies paid out more than $1.5 trillion last year as higher commodity prices and interest rates boosted profits.

Despite falling stock markets last year due to rising inflation and interest rates, global dividends grew strongly, underlining the importance of owning income-producing investments.

Janus Henderson, the fund manager, calculated that global dividends grew 8.4% last year to a record $1.56 trillion (£1.25 trillion). Underlying growth, which excludes one-off “special” dividends was 13.9%.

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In the UK, underling dividend growth was 12.1%, as 92% of UK companies raised dividends or held them steady.

Resurgent banking dividends were the main driver of growth in Britain, but the rise in oil payouts was also a significant contributor, as was the restart of BT Group (LSE:BT.A)’s dividend. The large mining sector saw payouts dip very slightly on a headline basis.

Overall, oil and gas producers and financials accounted for half of global dividend growth in 2022. Soaring energy prices meant oil and gas producers raised payouts by two-thirds in a mix of regular distributions and special dividends.

They contributed almost one-quarter of 2022’s increase in global dividends. Payouts were increased almost everywhere with emerging market companies showing the strongest growth.

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Banks and other financials, especially in the US, UK and Europe, contributed another quarter of the year’s growth, building on the strong dividend recovery from the pandemic that the sector enjoyed in 2021.

Elsewhere, sky-high freight costs boosted transport companies around the world, while soaring demand and higher prices for cars and luxury goods meant these sectors were the most important drivers of dividend growth in Europe. Lower commodity prices, by contrast, meant mining payouts fell from their record 2021 high point.

Despite some clear sector winners, growth was nevertheless broadly based. This is reflected by 88% of companies raising dividends or holding them steady, according to Janus Henderson.

Jane Shoemake, client portfolio manager for global equity income at Janus Henderson, said: “Despite rampant inflation, interest rate hikes, war and asset price declines in 2022, global dividends continued to grow, highlighting their importance to investors all round the world. Global dividends have completely caught up after the pandemic, with payouts back to their historic trend. This is an amazing achievement given the extent of economic disruption caused by Covid-19.”

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However, there are signs that the dividend boom will slow this year. By the fourth quarter of 2022, underlying dividend growth year-over-year had dropped to 7.8%, and there are signs that higher interest rates are affecting economic growth and corporate appetite for dividends.

Janus Henderson forecasts slower growth in 2023, with payments of $1.60 trillion, up 2.3% on a headline basis and equivalent to an underlying increase of 3.4%.

Shoemake says: “For the year ahead, there is more uncertainty over the prospects for dividends. Inflation, the extent of further rate hikes, and geopolitical risks all cloud the horizon. Corporate cash flow will come under pressure both from lower levels of demand and from the higher cost of servicing loans, limiting the scope for dividend growth.

“From a sector perspective, energy dividends are unlikely to repeat the sharp increases of 2022, while mining payouts will be dependent on underlying commodity process. That said, the re-opening of China is likely to boost economic growth once the current wave of Covid-19 infections passes. Among financials, banks may benefit from wider margins, thanks to the higher interest rate environment, so further dividend growth is certainly possible, subject to prudent planning for rising levels of bad loans as economic growth slows.”