Positive start to 2024 for UK dividends, but there’s a sting in the tail

Dividend investors have been rewarded so far in 2024, with payouts from UK shares rising nearly 5% in the first three months of the year compared with the year before.  

Underlying growth – which excludes one off-payments and just measures regular dividends – was 2% in the first quarter (Q1). 

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The data, from Computershare, tracks the payouts from 900 UK companies and will be viewed as good news by income seekers. Computershare forecasts headline dividend growth of 4.3% in 2024 compared with 2023. 

However, while dividends rose, so did share prices. As a result, the yield on the  UK market is around the same as a year ago at 4%.  

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But, it is not all good news. Excluding special dividends, Computershare expects dividend growth to be 1.5% this year, down from 2% growth last year. 

In 2024 so far, the airline, leisure and travel sector showed the fastest growth as they continued to recover from the pandemic.  

The restoration of dividends from easyJet (LSE:EZJ) and SSP Group (LSE:SSPG), after they were forced to cancel them in the early stages of the outbreak, meant payouts across the sector quadrupled year-on-year. They remain well below their pre-2020 levels, however. 

Banks are likely to make the largest contribution to dividend growth in the UK this year for the third year running, according to Computershare.  

However, not all sectors grew their payouts. A strong pound, which decreases the value of overseas earnings, contributed to a modest decline in dividends from the healthcare, oil and telecoms sectors.  

Oil is the most important sector for dividends, but growth is expected to be flat this year.  

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But that is not because oil companies are making less money. Instead oil companies, and especially Shell (LSE:SHEL), have shifted the emphasis significantly towards share buybacks in the last two years. Computershare says that in 2023, Shell and BP (LSE:BP.) returned almost twice as much capital to shareholders via this route than via dividends (£20 billion compared with £10.6 billion.) 

The food, drink and tobacco sector was the only large sector to show growth in the total value of dividends paid in Q1, mainly thanks to strong profits at Associated British Foods (LSE:ABF).   

Growth in dividends so far this year was split evenly between large and mid-sized firms. The payouts from the largest 100 shares were 2% higher on an underlying basis, with 94% of companies that paid a dividend in Q1 either increasing it or holding it steady. The next 250 largest companies posted dividend increases of 95%. 

Where are UK income fund managers investing?  

In a separate article we recently looked at the highest-yielding funds in this sector, using data from FE Analytics. As of the end of March, they were: abrdn UK Income Unconstrained Equity (6.75% yield); Axa Framlington Monthly Income (6.14%); Slater Income (5.82%); Chelverton UK Equity Income (5.67%); and JOHCM UK Equity Income (5.6%).   

Looking under the bonnet, we found that financials, such as banks and insurance companies, were a big overweight, as were basic materials, which includes mining and oil companies.  

Some key overlapping shares “approved” by professional investors were Barclays (4.2%) yield); BP (4.4%); Shell (3.7%); Legal & General Group  (8.1%);  GSK (3.6%); SSE (6%) and Aviva (6.8%).