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Quarterly Bulletin
Winter Edition
January 2010

Dividend income - an update

In our Summer Bulletin six months ago we wrote a melancholy article describing the fall in dividend income paid by UK companies. We are now updating you on the outlook again, as the situation is now more encouraging. There has not, of course, been a total transformation, but the worst fears have not been realised and there is a
now a sense of emerging from the tunnel rather than forging deeper into it.

About a quarter of companies in the FTSE 100 index have cut or passed their dividends since the financial crisis started to bite, and the aggregate level of dividends across the UK market has fallen by more than 20%, but the trend has improved substantially in recent months. The fear of some analysts, that the dividend base might fall by as much as 35%, has thankfully proved unduly pessimistic; it looks likely to even out at around 25%.

That is still the largest fall in a generation but, encouragingly, some of the largest companies have started to increase their dividends again. Even some of the banks - the worst offenders in the dividend drought - have started to pay dividends again more quickly than expected. In particular we certainly would not have put great value in the summer on the hope that Barclays would reinstate a modest dividend as early as November, as they have done. HSBC’s dividend in 2010 also looks likely to be more generous than we feared in the summer.

Meanwhile it now looks as though many of the largest companies will increase their dividends in 2010. The rise in the oil price has improved the outlook for BP and Royal Dutch Shell’s profits, and the likes of Astra Zeneca, Glaxo Smithkline and Vodafone have all increased their dividends recently. Some of the numbers involved may not be very eye-catching, but they give us confidence that the dividend base of the market has reached its nadir.

The FTSE All Share index now yields about 3.3%, and we expect that base to grow a little next year. Because the market has fallen much in line with the reduction in dividends, that yield is now back very close to the average through this decade. The dividend base is also much broader than it used to be, with many companies engaged in energy, telecoms, insurance, tobacco, healthcare and the utilities all offering attractive yields. So it has become easier to build balanced portfolios
generating solid income, without undue concentration on banks.

None of this, of course, disguises the fact that almost everyone’s dividend income has fallen over the last eighteen months, and it will take some time for incomes to return to previous levels. Moreover, with corporate bond yields having fallen, it is no longer so attractive to seek to replace yield from that source. We remain acutely aware that maintaining income levels as far as possible is a vital priority for many
of you, and we are keenly seeking out opportunities to replace yield wherever possible. As we said in the summer there is no magic wand here, but we are at least much more confident that we can now move in the right direction again, without compromising long-term strategic objectives.