Soaring dividend payouts reward income investors

UK corporates proved during the second quarter of this year that they are increasingly willing to reward their shareholders with dividends. In fact, the latest figures seem to have taken analysts aback, with records tumbling all over the place. 

Investors typically get mailed their biggest divi cheques of the year between April and June, and 2012 marked a return to pre-recession levels, with payouts reaching £22.6bn. Records had already been broken in the first quarter of the year when companies delivered £18.8bn in dividends. However, at the time analysts warned that a handful of special payouts had skewed the figures and some dark economic clouds on the horizon could soon ruin the party. Not so in the second quarter. 

Investors in UK listed firms earned an additional £3.5bn in the three months to the end of June compared to the same period last year, according to the research by Capita Registrars. Once again there were some special one-offs that flattered the figures, not least £1.0bn paid out by Old Mutual (LON:OML) on top of its £201m final dividend. Drugs giant GlaxoSmithKline (LON:GSK) and mining group Antofagasta (LON:ANTO) also issued substantial special payments and there were small specials from Savills (LON:SVS), Fidessa (LON:FDSA) and Millennium & Copthorne Hotels (LON:MLC). 

Overall, total gross dividends in the first half of the year reached £41.4bn, up 21.3 percent on 2011, and way ahead of the previous half year record of £34.6bn in the first half of 2008. The £7.3bn increase was also the largest jump in first half dividends on record. 

Dividend strategies excel 

Given those statistics, it comes as no surprise that one of the best performing stock strategies on Stockopedia right now is a Best Dividends screen. Not only has it delivered an annualised return of 45.5 percent but it has trashed the market over the past six months with a return of 16.1 percent versus -3.1 percent for the FTSE 100. 

The Best Dividends strategy is loosely based on a High Dividend Yield screen developed by the American Association of Individual Investors. Its aim is to hunt out attractively valued stocks with high dividend yields that are likely to see their share prices rise. Much of the emphasis is on looking for historic consistency and growth in both the dividend and the yield of the stock, adequate dividend cover and companies that are not too debt heavy. Best Dividends is based on an equal weighted portfolio of up to 25 stocks – and currently there are 40 stocks qualifying for the list. 

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Among the top ten candidates based on current yield, the biggest of the blue chips are represented by AstraZeneca (LON:AZN) and £BA., while construction firms Carillion (LON:CLLN) and Balfour Beatty (LON:BBY) and financial groups Tullett Prebon (LON:TLPR) and IG Holdings (LON:IGG) also appear. The two smallest firms in the top ten are recruitment group Harvey Nash (LON:HVN) and construction and fit-out specialist Interior Services (LON:ISG), which leads the list. 

Interestingly, Interior Services has kept investors on their guard since the start of the year with warnings about deferred contracts and margin pressure. In fact, the company’s exposure to the commercial fit-out market, particularly in a recession, has been an long-term concern of those pondering its otherwise alluring dividend yield. Perhaps inevitably, the company recently held up its hands and declared a dividend cut when it reports its full year figures in September. That will ultimately disqualify Interior Services from this screen, although the forward yield is still a reasonable 7.9 percent and the company remains one of the top ranking stocks in the market according to Joel Greenblatt’s Magic Formula. 

Investors still nervous 

The impressive dividend numbers from the second quarter of this year marry up with the performance of the Best Dividends screen quite nicely. For many investors dividends make a huge amount of sense when the overall yield on equities is now 4.4 percent compared to a miserable 2 percent for government bonds. However, it is also interesting to note that private investors went on a massive selling spree between March and May (again, according to Capita Registrars). Investors dumped £1.0bn of stock, which was five times the amount they had bought in the previous three months. So what does that say about the sentiment among investors? Uncertainty rules – but the opportunities of a carefully conceived dividend strategy could be worth a closer look.