Why AIM shares have become more dividend-friendly

Since 2012, AIM dividends have tripled versus 45% growth in main-market dividends. We explain why.

Shares listed on the junior AIM market are set to return a record amount of cash to shareholders this year in the form of dividend payments, according to new research.

According to the latest annual AIM Dividend Monitor from Link Group, dividends from shares listed on AIM jumped 23.9% on a 'headline basis' (including one-off special dividends) in the first six months of 2019. When stripping out special dividends, the so-called underlying basis of dividend growth stood 13.9% higher compared to the first half of 2018.

On a headline basis, the total amount handed back to shareholders was £633 million, meaning that AIM dividends are on track to break 2018's record of just under £1.2 billion. Link Group has forecast that AIM dividends for 2019 will come in a smidge over £1.3 billion.

Overall, since 2012 AIM dividends have tripled versus 45% growth in main-market dividends. The big driver behind this has been the fact that since August 2013 AIM shares have been eligible for inclusion in tax-free ISAs.

Another key attraction is the fact that most AIM-listed shares also tick the inheritance tax (IHT) exemption box. These stocks have therefore won an army of new investors focused on estate planning, via IHT investment planning services operated by various wealth managers and fund managers.

As a consequence, certain AIM companies – typically the biggest constituents in the index that are typically the most liquid to trade – have, over the years, become more dividend-friendly to cater for this new investor crowd. Examples of companies that were among the top 10 dividend payers in the index in 2017 and 2018 include Redde (LSE:REDD), James Halstead (LSE:JHD), Polar Capital Holdings (LSE:POLR) and Abcam (LSE:ABC).

In 2019, Link Group expects almost 35% of AIM companies to pay a dividend, up from 26% in 2012.

But bear in mind that the yields are notably lower than those listed on the main market, owing to AIM companies having relatively lower free cash flow while they are in their growth phase. Over the next 12 months, Link Group expects the AIM market to yield a collective 1.5%, whereas FTSE 100 firms are set to yield 4.4%.

Michael Kempe, chief operating officer at Link Market Services, says: "Dividend growth matters because it lies at the heart of share valuations. The faster the growth rate, the higher the value. And the more visible the dividend stream, the more certain an investor can be about its value.

"It is obviously very hard to predict growth rates for young companies, but even the very presence of a dividend in the first place is a useful hygiene factor."

But, as Kempe cautions, despite rapid ongoing dividend growth, the value of AIM companies has fallen sharply over the last year, with the FTSE AIM All-Share Index down 20% year-on-year to 9 September.

The AIM market is notoriously high-risk and volatile, as the index houses numerous highly speculative companies, many of which fail. Number-crunching by the London Business School found that over the past two decades (1995-2015), around 3,000 companies listed on AIM. Most, however, were duds, with nearly three-quarters never producing a positive return for investors.

There are gems – 39 companies returned more than 1,000% over the period examined – but they are in short supply. They account for just 1.4% of the historic total.

Kempe adds:

"Any associated economic slowdown will certainly impact the ability of AIM companies to grow too. Thinking longer-term, however, the trend of dividends from AIM companies remains upwards, and that should drive shareholder returns. In this context, braver investors may consider current low valuations of AIM stocks as an opportunity."

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