Dividend payments from the UK market have shown an annual increase in all but five years since the beginning of 1965, according to analysis by Fidelity International.
It suggests growth in dividend payments is far more reliable than share prices rises as annual increases in dividend payments ran into double percentage figures for almost half of the past 42 years, peaking at 24% in 1979.
The golden period for dividend growth was the seven years between 1984 and 1991 when payouts rose by a minimum of 12% each year, Fidelity found.
In the five years when aggregate dividend payouts failed to rise, the decreases were small in all but one year. The years were 1967 (-2%), 1993 (-1%), 1998 (-14% following a change to dividend tax credits that also hit pension funds), 2000 (-3%) and 2001 (-0.2%).
The research also showed that in the majority of years, dividend growth exceeds inflation. Exceptions have been a bout of hyper-inflation in the mid-1970s that wiped out the real returns from double-digit dividend growth, the early 1990s and the early years of this decade (using the retail price index (RPI) as the benchmark for inflation rather than the newer consumer price index (CPI)).
Fidelity also highlights the importance of dividend reinvestment. It says anyone who invested £1,000 in the FT All Share Index ten years ago would today have a portfolio worth £1,040 – unless they reinvested the dividends. In this case, their portfolio would be worth £1,404. In real terms, assuming long-run inflation of 3%, the investment has retained its value.
Commenting on the findings, Sam Morse, manager of the Fidelity MoneyBuilder Growth fund, says: “It is well-known that any attempt to time the market is fraught with risk. This analysis underscores the point that even through the turmoil of the past decade, total returns from UK shares have held up well in both nominal and real terms, provided that you reinvested your dividends.
“I regard dividends as key to UK equity investment and I’ve always viewed dividend growth as a leading rather than lagging indicator of stock market outperformance. Companies that grow their dividends consistently each year without interruption generally outperform the rest of the market. Encouragingly, despite the difficult backdrop, the consensus forecast for dividend growth in 2008 is 4%.”
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