Dividends deliver – behind the headlines

UK companies paid a bumper £36.7 billion in dividends to investors in the second quarter of 2024 — an 11.2% increase from the previous year. But there are some important caveats behind these positive headline figures.

A substantial portion of these dividends came from ‘special’ one-off payments, which amounted to £4.1 billion. Notably, HSBC contributed £3.1 billion following the sale of its Canadian subsidiary. When excluding these special dividends, the increase in regular dividends was a more modest 1%.

Dividends play a crucial role in enhancing overall investment returns, particularly when reinvested. Over the past 20 years, the FTSE 100 index returned 65% to investors, but including dividends, the total return jumps to 239%, or 6.6% annually.

However, not all companies pay regular dividends. Mature, financially stable companies, such as utility firms, banks or oil companies, are more likely to distribute dividends. In contrast, companies in rapidly evolving sectors like technology often reinvest profits in the business to fuel growth, rather than returning money to shareholders via dividends.

Largest companies dominate

In the UK, nearly 90% of dividends come from the largest companies in the FTSE 100. Banks were the strongest contributors to dividend growth in Q2 2024, with many on track for record payouts this year. Healthcare companies also showed strong dividend growth. On the other hand, economic challenges have been reflected in a significant drop in dividends from mining companies and a decline in payouts from housebuilding firms.

However, excluding the weaker mining sector, the UK market saw dividend growth of 8.6%, indicating that investors can still find income opportunities despite sector-specific slowdowns.

✢ The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.