Just because Capita’s Dividend Monitor excludes investment trusts, it doesn’t mean investors in closed-end funds can ignore it. For the report, which keeps a beady eye on the payouts of companies on the London Stock Exchange’s main market, acts as a dividend barometer, not only monitoring the level of dividends that have already been paid, but also providing an indication of what can be expected going forward, both at sector and wider market levels. The Monitor is therefore relevant for any trust which invests in the UK market with a view to generating sustainable and growing dividends of their own, none more so than those in the UK equity income sub-sector.
Capita’s Q3 2017 report makes good reading for income fund managers and investors alike. During the three months to September, £28.5 billion was paid out by UK companies. Not only is this a 14% increase on Q3 2016, it is the highest total ever paid during the third quarter. Even when £1.5bn paid out in the form of special dividends during Q3 is excluded, dividends were up 13% to a record £27bn during the quarter. The strong quarterly performance led Capita to adjust up its full-year forecast for dividends distributed by UK companies by over £3bn to £94bn which, if hit, would be an 11% increase on the previous year, and a 6.8% improvement on the existing record of £88.1bn which was set in 2014.
As for what is behind 2017’s record breaking performance, Justin Cooper, chief executive of Capita Asset Services’ Shareholder Solutions, said: “We had high hopes for 2017, but the dividend seam is proving even richer than we expected, as the mining sector finds its footing again. Investors have struck gold as this year’s haul easily smashes the previous record set in 2014. Generous payouts have been topped up by big exchange rate gains between January and June and very large special dividends, setting 2017 up to be a sparkling year.” Indeed, two-thirds of the increase in dividends is down to the return to health of London’s mining companies: Anglo American and Evraz both returned to the dividend list; while not to be outdone BHP Billiton tripled its payout.
The big question is can the drivers behind 2017’s expected record performance be repeated again? Mr Cooper added: “Exchange rate gains will be gone in 2018, unless the pound takes another jolt downwards as the Brexit talks unfold, and most of the big companies who cancelled dividends in recent years have already restarted them, so that additional sparkle will have dulled.” But while further growth from such elevated levels may prove to be a stretch, Capita’s Mr Cooper is positive: “Even so, the overall value distributed by UK plc is likely to remain at or near 2017’s record levels”.
What does this all mean for the UK equity income sector? One takeaway from Capita’s latest report would be that those funds with a healthy weighting to natural resources and/ or to those companies which pay their shareholders in dollars would appear to be in good shape, at least for the next year or so.
Based on a quick tot up of the top ten holdings of funds within the sector, a number of trusts are well placed to benefit from this year’s dividend windfall. Top of the pops is Merchants Trust which, based on just its top ten holdings as at 31 August 2017, had 27.7% invested in dollar payers including a 3.6% interest in BHP Billiton. Three JPMorgan trusts are also strongly positioned: as at 30 September 2017, JPMorgan Income and Growth, JPMorgan Elect Managed Income and JPMorgan Claverhouse had 27.6%, 26.5% and 22.5% respectively invested in dollar payers including an interest in miner Rio Tinto. Temple Bar has a healthy 26.7% smattering of this year’s star dividend payers. As at 30 September 2017, Schroder Income Growth was not far behind with 25.9%, including a 4.3% weighting in Rio Tinto. Meanwhile as at 31 August 2017, Dunedin Income Growth had over 20%, including miner BHP Billiton.
Of course there are many variables at play when assessing the sustainability and direction of investment trust dividends, but it goes without saying that stock selection is key. Encouragingly, in terms of strong dividend payers at least, a number of names in the UK equity income sector find themselves in the right stocks at the right time and as a result are set to reap the dividends.