While savers in deposit accounts have never had it so bad, investors who rely on a rising income from shares are basking in the sun.
The latest data from share registrar Capita Asset Services shows that dividends paid by UK companies in the second quarter of this year were a record £33.3 billion – nearly 15 per cent up on the same quarter last year.
The biggest contributors to the overall dividend bounty were HSBC, Royal Dutch Shell, National Grid, Lloyds Banking Group and tobacco giant BAT.
Fund manager Ciaran Mallon has been running income portfolios at Henley-based asset manager Invesco Perpetual for 12 years
The payments, Capita says, were buoyed by a combination of strong profits, a weak pound (boosting profits made abroad) and several one-off dividends made by leading firms.
It is now predicting that dividends this year will total more than £90 billion – 7 per cent up on 2016.
Though healthy dividends will cheer income-seeking investors, fund manager Ciaran Mallon is not getting carried away.
He has been running income portfolios at Henley-based asset manager Invesco Perpetual for 12 years and knows that it would take little to break the cycle that has seen UK dividends surge in 2016 and the year to date – for example, a failure by the Government to do a Brexit deal promptly and in the best interests of British business.
‘If you look at the dividends firms are paying as a proportion of earnings they are generating from business activities that ratio has been rising for a while,’ he says.
‘At some stage, that upward trend may well break down, as it has done in the past, bringing a halt to dividend growth.’
Cautious words from a manager who in his modest and quietly efficient way has just steered the Invesco Income Growth Trust to its 20th consecutive year of dividend rises.
This achievement has won it the label of ‘dividend hero’ from the investment trust lobby group, the Association of Investment Companies.
It joins 20 trusts that have delivered two decades or more of consecutive annual dividend uplifts.
Like other ‘heroes’, Invesco Income Growth has grown its dividends through thick and thin by astute use of income reserves.
It is into this financial tank that dividends from the trust’s 45 holdings are poured, and it is from it that income payments to shareholders are made.
The tank always has a reservoir to ensure shareholders continue to enjoy a growing stream of income.
‘We dipped into the reserves in 2010, 2011 and 2013 to support our dividend payments to investors. But for the past three years we have been refuelling the tank,’ says Mallon. The result is sufficient reserves to pay the equivalent of two thirds of last year’s total annual dividend.
Like all investment funds, Invesco Income Growth is not without risk but it is managed conservatively by Mallon.
He only holds UK companies, though he has the power to invest abroad, and the fund is 70 per cent invested in FTSE 100 firms, 15 per cent in FTSE 250 firms, 12 per cent in FTSE Fledglings and 3 per cent elsewhere. There is no long tail of smaller company holdings, because Mallon likes each company stake to count.
The trust’s current yield (the dividend divided by share price) is 3.5 per cent and fund costs are on the low side at 0.71 per cent.
Mallon says this makes it a core holding for many investors with ‘a combination of an attractive, rising income and a decent capital return’. Over the past five years, it has outperformed its benchmark, the FTSE All Share Index, admittedly not by a lot.
Boring? Maybe. But sometimes boring, as far as investments are concerned, is best.