Meanwhile, SSE will reduce its dividend next year and BT recently suggested it could cut its payout in future to fund the expansion of its UK fibre broadband network. Other names are also causing concern: OLIM noted in its mid-year report that Centrica’s earnings were under “great pressure”. That said, dividend payers such as HSBC have seen business conditions improve.
Patrick Harrington, a director at OLIM, notes: “Doubts still hang over the dividends of some of the market’s largest income stocks, but the companies involved are most likely to maintain payments at the expense of their balance sheets, at least over the short term. However, this is not a process that can continue indefinitely.”
Rocks and hard places
While this is unwelcome news for clients with decumulation needs, UK equity income remains a core part of many portfolios focused on yield. A combination of investor nerves and loose monetary policy have sent bond yields tumbling this year, while other equity markets yield less and are even more vulnerable to currency effects than UK shares. And as discussed in this month’s cover story (see page 34), the likes of alternative assets such as infrastructure offer good yields but can come with their own problems.
Investors who stick by UK shares will have to be selective, whether they are buying equities or using funds focused on this space. This can mean exercising caution when it comes to stocks with particularly high yields, or at least offsetting this risk with exposure to steady, lower-yielding names.
Mr Murphy notes: “There’s a high headline yield [in the market], but as we saw with Vodafone, companies are often very high-yielding for a reason. You have to have the balance between some of the high-yielders and those that can grow their dividend.”
As Table 1 shows, some yield forecasts for 2019 remain eye-wateringly high. Persimmon’s stands at 12 per cent, with three other payout levels also reaching into double figures. Dividend cover, inevitably, varies.
Table 1: Yield forecasts and dividend cover for 2019
Company | Dividend yield (%) | Earnings cover |
Persimmon | 12 | 1.2 |
Centrica | 11.5 | 0.94 |
Taylor Wimpey | 11.3 | 1.15 |
Imperial Brands | 10.2 | 1.36 |
Evraz | 9.3 | 1.35 |
Direct Line | 9.1 | 1 |
TUI | 8.5 | 1.6 |
Barratt Developments | 8 | 1.54 |
Standard Life Aberdeen | 7.9 | 1 |
Aviva | 7.8 | 1.86 |
Source: AJ Bell. Copyright: Money Management
Those with the biggest yields can struggle in performance terms. As the FT recently reported, analysis by wealth manager Brewin Dolphin found that if investors had picked the 10 highest-yielding shares on the FTSE 100 five years ago, these names would have underperformed the index.
Sector considerations should also play a part in the funds or shares investors choose. AJ Bell notes that nearly a quarter of dividends forecast for 2019 should come from financials, with a fifth coming from oil and gas names. The full sector breakdown is outlined in Chart 2.
Payouts remain concentrated among a small group of individual companies and sectors, so investors often struggle to avoid the biggest payers. But they should at least remain aware of the challenges specific sectors could face.
