Savers missing out on billions in dividend payments

savers turning their backs on equities are missing out on billions of pounds in pay-outs after UK company dividends hit a new record in the early months of this year.

The dividends paid out by UK listed companies soared 25 per cent to almost £19 billion in the first quarter of 2012, according to Capita Registrars, which forecasts a record £76.3bn pay-out in 2012.

The figures delivered a boost to investors as markets continue to be dogged by uncertainty amid fresh concerns over the future of the eurozone. Yet many savers overlook the advantages of dividends and the invaluable income they offer. Recent months have seen a new shift away from equities in search of perceived safe havens such as corporate bonds and structured products.

Dividends aren’t all about investing in company shares and pocketing the pay-outs, however. Hundreds of funds and investment trusts scour the UK and beyond for companies paying the best and most consistent dividends to provide a solid, regular income for investors.

And income isn’t the only reason why dividends are seen by some as the Holy Grail of investing, as they also dramatically increase the compound returns on investment.

Reinvested dividends (where they are not taken as income) are the biggest single component of investment returns, accounting for more than 40 per cent of total equity growth over the typical ten-year period.

William Hunter, director of Hunter Wealth Management, in Edinburgh, said: “Dividends add enormously to the long-term return of an investment and are extremely tax-efficient as well.

“As time passes, dividend investors see their income steadily grow. You don’t have to wait ten years to see if it has been a decent investment.”

In the current low-growth environment, reinvested dividends may provide more than half of the growth you get. Even as worries persist over the economic outlook, more big firms are resuming or increasing their dividend payments – BT being the latest when it pledged recently to raise its dividend by nearly 15 per cent.

Hunter pointed out that even when share prices are volatile, chief executives are generally loth to reduce their dividend pay-out.

“Good companies try to grow their dividends. Companies that grow their dividend on a regular basis tend to be those in better shape,” said Hunter. “Companies that pay a sustainable and growing dividend can be more resilient in downturns.”

So how can you ensure you don’t miss out on this invaluable source of income and growth? The easiest and most cost-effective way to benefit from dividend income is to invest in collective funds such as unit trusts/open-ended investment companies and investment trusts.

A third of investment trusts pay income of more than 3.2 per cent, according to recent research by the Association of Investment Companies, higher than the FTSE 100 average yield. UK and global income trusts and some investing in property are averaging dividend yields above 5 per cent a year.

Some are remarkably, consistent too. Alliance Trust, Bankers Trust, Caledonia Investments and the City of London Investment Trust are among several to have raised their dividends every year for more than 40 years.

“Investment trusts in the equity income sector are worth considering, including the Troy Income & Growth trust,” said Tom Munro, owner of Tom Munro Financial Solutions in Larbert. “Investing in predominantly UK equities the fund is currently yielding 3.6 per cent and has an impressive three-year track record.”

Among unit trusts funds in the UK equity income sector are particularly popular among ordinary investors. The average fund in the sector is down 6 per cent over the last year but up 35 per cent over three, according to Financial Express. Around 15 funds are currently producing yields above 5 per cent, with several dozen others paying 3.5 per cent or more.

“The Henderson UK Equity income fund is the pick of the unit trust, offerings yielding 3.5 per cent as well as an impressive track record,” said Munro. “The fund currently has holdings such as GlaxoSmithKline, BP and Hiscox, but recent focus has been on industrials where dividends have been strongest.”

Tracker funds are also a good option, said Munro, especially for investors trying to keep their charges down. “For cost-conscious investors, look no further than the Vanguard FTSE UK equity index fund, which seeks out only the highest paying dividend shares in the index to generate an income yield currently 4.7 per cent plus capital appreciation,” said Munro.

The fund has grown 18.6 per cent [with income reinvested] since 2009 and has an annual management charge of just 0.2 per cent.

A growing number of investors are getting their dividends from overseas firms, capitalising on a recent marked rise in the number of global income funds available. The appeal is due partly to the relatively concentrated nature of the UK market, where 35 per cent of dividend last year came from the five biggest dividend paying companies.

Over the last 12 months the average fund in the Investment Management Association’s global equity income sector has produced an average yield of 4.5 per cent.

“On a global theme, Invesco Perpetual’s Global Equity Income fund will provide more diversification seeking out strong dividends across the majority of developed markets with the largest exposure – 42 per cent – unsurprisingly in North America,” said Munro.