Dividend party for UK investors may soon be over

Investors on the hunt for dividends are having a fine old time of it.

Broker AJ Bell recently found 20 FTSE 350 (which includes the blue chip FTSE 100 and the second tier FTSE 250 indices) companies that have managed to increase their payouts by more than inflation over every year of the past decade, with the average annual hike ranging from a stunning 34 per cent (in the case of Ashtead, which hires out industrial equipment) to a still highly respectable 7 per cent.

Meanwhile Link Group’s UK dividend monitor found that in the second quarter of this year, they rose 14.5 per cent on a headline basis, with the total pay out hitting a record at £38.7bn. That’s £4.4bn above the previous high set two years ago.

The party has even extended to the junior AIM market, which is where smaller, and faster growing companies, are usually to be found. These are the sort of businesses you would expect to be consuming their investors’ capital in pursuit of growth, rather than throwing off an excess to return to their shareholders.

Yet Link found that their combined payout jumped by 23.9 per cent over the first six months of 2019, with a record £633m showered upon investors.

Capitalism’s fiercest critics often use the phrase “shareholders’ dividends” as code for everything wrong with the world’s dominant economic system.

That’s not fair, say its defenders. Investors who hand their money over to companies to fund their activities, and take risks by doing so, ought to be rewarded. The dividend is an important part of that.

Dan Coatsworth, stockmarket analyst at AJ Bell, makes the point that there are some sizeable companies on AIM and a lot of those paying dividends operate in sectors that don’t require oodles of capital, such as the media, finance or support services.

“If you look at the FTSE 250 you’ll see a universe of more mature businesses, which generate sufficient cash to reinvest in their business and pay dividends,” he says.

When you move up to the FTSE 100, if you exclude Scottish Mortgage, an investment trust that invests in other companies, 97 out of the 99 companies offer a payment.

But can you have too much of a good thing? Are UK companies too focussed on their payouts at the expensive of investment. You could certainly make the case.

It goes without saying that the UK has a fairly poor record when it comes to business investment, particularly when compared with European countries such as Germany, where payouts have historically been lower.

The oft-discussed skills gap is partly a function of that. In this column last week, I highlighted an Opinium survey for consultant PwC, which found that only about half of Britain’s workers get the opportunity to undertake training despite strong demand among them for it. This country was at the bottom of 13 countries included in a fairly exhaustive study.

Focussing on keeping shareholders sweet at the expense of the long-term health of their businesses is ultimately a self-defeating strategy. It’s also economically damaging.

That doesn’t prevent it from happening, particularly in cases where a CEO’s bonus is linked to the payout, as sometimes happens.

Can anything be done about this?

Gordon Brown, the former Labour chancellor, said he wanted to address the issue when he scrapped pension funds’ dividend tax credit. This deprived final salary schemes, which offer workers guaranteed pensions, of billions of pounds, hastening their closure in favour of less generous “money purchase” schemes. They put all the risk on employees and are now the norm in the private sector.

The Institute for Fiscal Studies found little evidence that the measure had done anything to encourage business investment several years after the event. Meanwhile, while it was interrupted by the financial crisis, the dividend train has just kept on rolling.

Brown’s critics have long argued his real intent with this “smash-and-grab raid on pension funds” was to boost the exchequer rather than boost business investment. He denied that but, in my view, they’re probably right.

If a future government genuinely wants to encourage investment, and that would be a good thing, it may be wise to rely upon subtler means, involving some carrot as well as a stick.

In the meantime, the dividend train looks set to keep on rolling until the next economic shock.

Companies hate cutting their payouts, but with Brexit rapidly approaching and the world’s economy slowing, it’s on the way.

The extended party investors have enjoyed may soon be over.