Larger dividend yields from smaller companies

Mid-cap companies are offering marginally better dividend yields than large caps as companies in the FTSE 100 move to lower dividends to maintain profits.

UK companies have been shying away from dividends, with share buy backs being the alternative, more tax efficient option, says Stephen Payne, UK fund manager at Framlington.

In September the FTSE 100 was yielding around 2.06% net, while mid caps were offering an average of 2.28%, he says, noting that "as the company size decreases, generally the dividend yield is increasing."

Market dividend growth forecast is normally around 10%, this year the actual growth is around 3-4%, severely underperforming expectations, Payne says. With dividends of 13-14%, UK growth is significantly behind the market.

Payne says: "One reason for this lagging dividend growth is instead of deciding dividends in relation to earnings, companies are now looking at inflation. Lower dividends basically help to maintain profits."

Dividend yields are also in decline as it is more tax efficient to buy back shares. Long term this may cause problems, as older investors want an income, so pressure may be put upon companies to offer dividends.

Bill Mott, fund manager of Credit Suisse Income fund, agrees: "The ageing have a need for equities that pay out dividends to supplement their income."

Payne believes banks tend to give the highest dividend, with growth being about 20% the yield is generally more than 3% on stocks such as HSBC.

Telecom earnings growth is quite high but lower dividend yields are being produced

The technology companies that do give dividends have good growth and lower yields, which indicates they are better performers. Industrial companies have good yields but are struggling in the market.

His consensus is that mid caps generally give better dividends, but there are some select large caps that are providing a decent dividend stream.

He says: "The rise of the new economy will bring low overall yield of the market and less dividend payouts."

Mott says: "Equities paying out dividends should not be the exception, but the rule." He believes the only justification for not paying out dividends is if the company is in an exciting period of growth, and it would be more advantageous for all parties if the money was reinvested in the business.

For more mature companies with lower rates of growth, Mott believes that dividends should be paid.

The trend away from dividend payouts will continue, says Mott, and will increase the volatility of the market.

George Luckraft, investment director at ABN Amro identifies some of the stocks he holds, that are providing good dividend yields.

He agrees with Payne that mid cap companies are typically offering more dividends than large cap companies.

The majority of utilities are mid caps and are providing good streams of income, he says.

He cites Scottish and Newcastle, the brewery company, BATS, a tobacco company, engineering company FKI, as good yielding companies in the mid cap area.

Fiona Henderson

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to