Here’s why the dividend boom is forecast to slow in 2023

Tough economic conditions mean that total dividends from UK companies will fall this year compared with 2022. 

Total dividends from British companies are forecast to fall this year, as special dividends dry up due to slow economic growth.

Link Group, a financial data firm, forecasts a 2.8% drop in dividends in 2023 compared with 2022. This would mean £91.7 billion returned to shareholders compared with £94.3 billion last year.

The drop is due to a sharp decline in special dividends as economic conditions worsen. However, underlying dividends – which just include standard payments that companies make to shareholders – are forecast to increase 1.7% this year.

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“Mining payouts, which have been a powerful engine of growth in the last two years, are likely to fall, although the extent of this decline is very uncertain,” Link said.

Special dividends began to wind down last year, with companies registering a one-third decrease in special dividends compared with 2021.

A strong year for dividends last year means that year-over-year comparisons for 2023 make for difficult reading.

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Dividends from British companies rose 8% in 2022 compared with 2021, with payouts in the final three months of the year increasing 7%. Underlying payouts rose 16.5% to £84.8 billion in 2022.

The weak pound boosted payouts by £3.8 billion as many companies generate profits in US dollars, or other international currencies, and then convert them back to pounds.

Link calculated that record mining dividends accounted for £1 in every £6 distributed by UK companies in 2022, double their average over the last decade, but they were falling sharply in the second half of the year.

Banks made the largest contribution to growth in 2022, followed by oil companies, while almost every sector delivered double-digit growth, although more defensive sectors such as food and utilities were slower, according to Link.

FTSE 100 dividends rose by a headline 9.1% in 2022 and an underlying 14.8% once lower special dividends were excluded. The next 250 largest companies’ dividends rose by a headline 5% and an underlying 23.8%.

Share prices recovered in the fourth quarter of last year, so the prospective yield of UK companies fell and is now at 3.7% for the next 12 months.

Higher interest rates have reduced the gap between the stock market yield and income on offer from bonds and cash to its narrowest in more than a decade.

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Today, bonds offer 3.4%, based on the UK 10-year gilt. A year ago the yield was 1.2%.  

Ian Stokes, managing director at Link group, said: “The economic skies are decidedly gloomier both in the UK and around the world than this time last year. Company margins in most sectors are already under pressure from higher inflation and squeezed household budgets. Soaring interest rates are now crimping profits by raising debt-service costs too. This will leave less money for dividends and share buybacks in many sectors.

“We do expect underlying dividends to grow in 2023, however. Even with lower mining payouts, there is good growth coming through from the banks and oil producers and across the wider market, cuts made during the pandemic mean payout ratios are conservative on the whole.”