Paying dividends

After a long and bumpy ride, it seems the tide may be turning. 2011 was a bumper year for dividend payments, with total dividend payments from UK companies reaching a record £67.8bn, gross dividends rising almost a fifth over the year (19.4%) and well over a quarter (26%) year on year in the fourth quarter of the year alone, according to research from Capita Registrars

For pension schemes, this represents a much needed shot in the arm. With equity prices generally depressed in light of the Eurozone crisis and the continuing, sluggish economy, surging dividend payments are of great comfort to schemes wondering how to pay beneficiaries. But while there was broad based growth across the year, which has translated into more money being available to pay out, there are other factors schemes should bear in mind.

Firstly, the high growth between 2010 and 2011 was slightly distorted by special dividend payments – that is, specific ‘one off’ dividends outside of the normal dividend paying cycle. Secondly, BP – one of the largest single payers of dividends – suspended its payment in 2010 due to the cleanup and compensation costs of the Deepwater Horizon oil spill off the US coast. In 2011, it was able to pay out £1.8bn more than the previous year. Special dividends from 19 companies also accounted for £2.9bn of payments – up from £700m from 13 companies in 2010 – with two firms alone paying out £2.2bn.

But there has been a broad increase in dividends across the board. Of the 438 companies which paid out dividends last year, 373 (85%) increased their payments while 90 firms cut or cancelled dividends. In 2012, Capita says barring a catastrophic turn of events in the Eurozone, total UK dividend payments could reach £75bn.

Of perhaps greater cheer to investors is a palpable sense that 2012 could see a sizeable bull run on the FTSE 100. January saw the biggest increase in the FTSE for over 20 years, with a 3% rise. Strong Januaries historically augur well for the outlook for the rest of the year. Again, with the caveat that the great unknown of the solution to the Euro crisis could ruin everything, many investors are confident of a strong 2012 FTSE rally. Research by Barclays Stockbrokers shows that almost half of investors (46%) are bullish, with a third (30%) undecided and a quarter (24%) pessimistic. The prospect of the FTSE ending the year comfortably above 6,000 points is no longer being dismissed out of hand.

Returns from the FTSE are the lifeblood of pension scheme investments as they provide the mainstay of income. As such, it is cheering that in the current poor economic environment, companies have decided to pay out record dividends. The outlook for 2012 shows this should continue. While a workable and lasting solution to the Eurozone’s problems is by no means guaranteed and further, unforeseen crises cannot be ruled out, 2012 could be the first year in many that schemes have something to celebrate.