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The release of the latest Capita Dividend Monitor highlighted the importance of income in the UK market. The £33.3 billion paid in the second quarter was the largest on record and was 14.5% up on the same period last year. Once stripping special dividends and the effect of a weak Sterling after last year’s Brexit vote, underlying dividends increased 7.8%.

The dividend paying culture in the UK remains strong. Whilst the latest numbers are exceptional, with a weakening economy and Sterling remaining stable, the outlook for the next few years isn’t as good as the last few. However, in the long run, I still remain a fan of dividends and their ability to grow faster than inflation.

Since 2008 there has been annual dividend growth of approximately 4% from the UK market compared to approximately 2.5% a year inflation over the same period. Even if you are spending your dividends and not reinvesting, your income will have risen quicker than inflation.

Dividends still remain the cornerstone of portfolios. The difference in the long run of total return, i.e. reinvesting dividends, versus just the capital return is stark. Using the UK Equity Income sector as a proxy, over the last 20 years the average equity income fund has grown by 151% in capital terms, but by reinvesting the income the total return would have been 283% – almost double.

Equity income funds are still the mainstay of many investor’s portfolios and with good reason. The twin aims of capital growth alongside income growth makes for an ideal core to portfolios. Luckily it is a very competitive sector with many high quality funds and managers.

Whilst the market has grown dividends by 4% each year over the last decade, some of the best equity income funds have increased their dividend by much more. For example, JO Hambro UK Equity Income, managed by Clive Beagles, has increased the dividend payout by an average of 10.5% each year for the last decade.

One negative on the horizon for UK investors, and a reason to maybe consider adding some overseas equity income exposure is that dividend payout ratios have been steadily increasing for the last few years; there isn’t much wriggle room for companies if profits take a fall.

Ben Yearsley July 2017

This article represents a personal view from Ben Yearsley, and is based on his opinion of economic data from the UK and across the globe. It should not be used for investment purposes and does not constitute advice. For investment advice please refer to your financial adviser. No party should act or refrain from acting on anything contained in this material. Relevant primary materials should always be consulted at all times for all purposes. No statements or representations made in this material, document or at the presentation are legally binding on Shore Financial Planning (Plymouth) Ltd or the recipient and no liability is accepted in connection with this material. This article may not be reproduced or circulated without prior permission. Issued by Shore Financial Planning (Plymouth) Ltd, authorised and regulated in the UK by the Financial Conduct Authority.

© Copyright 2017 Shore Financial Planning (Plymouth) Ltd.

Dividend growth over ten years easily beats inflation
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