Investors return to high-dividend shares ‎

This was split among 438 companies, where 373 increased, started or reinstated dividends, while only 59 cut them. They also note that BP, even though it paid a dividend half the size it had previously, re-joined the top-five FTSE dividend payers.

Royal Dutch Shell holds the top spot, paying £6.7bn, second is Vodafone accounting for £5.1bn, third HSBC – only one of two banks to remain in the top 15 – and the fourth spot went to pharmaceutical giant Glaxosmithkline.

Dividends by sector were still dominated by the financials (but their influence is waning) paying £13.2bn. The 2011 total is still more than one third lower in cash terms than the peak of financial distributions in 2007, however. Oil and gas firms are the next industry, paying £11.2bn. The fastest growing sector was the materials industry, rising 88% on 2010 (See Table 1 below for a full breakdown of all sector figures).

Company dividends are also set to rise in 2012 by 10% to £75bn predicts Capita – this will be led by payments from Vodafone – strengthening the case for income investing.

Companies that pay top dividends are often household names with good steady incomes. The combination of strong corporate balance sheets at present and modest long-term expectations on equity returns is also driving the interest in income funds and these companies produce the regular payments that suit pension fund liabilities.

For these companies there are also other less apparent positives according to Lazard Asset Management global equity income fund manager Pat Ryan. He believes the capital discipline that paying dividends instils in the management of a company is vital.

“It keeps them from wasting money on poor re-investment – in short it just leads to better managed companies,” he says.

Going global

It’s not just the UK where pension schemes and fund managers are looking to take advantage of good dividends.

F&C head of systematic equity strategies Erik Rubingh, while noting that the UK has a very strong dividend paying culture for historic reasons, believes there are also high quality dividend paying stocks all over the world.

“There are some very good dividend-paying stocks in Europe and parts of Asia – Taiwan for example has a good payout rate,” he says.

This point is echoed by BlackRock global equity team portfolio manager Richard Turnill, who feels there are good opportunities in Asia as the area’s economies are growing stronger. He also makes the case that continental Europe – shunned due to political issues – is also an appealing zone to be investing in.

“People often confuse the European economy with the stock market in much the same way they do with the UK. There are some high-quality businesses that have benefited from a weak euro and we’ve been taking advantage of this situation and buying some of these companies,” he says.

Finally, he comments that Japan, previously an unloved area of the globe because of higher yields and a lack of focus on shareholders, has started to have a shift in attitude:

“There are a number of attractive higher yielding names, stronger management and greater focus on shareholder returns. The yen is no longer appreciating and companies are able to raise enough and pay dividends in the future. It’s an area that we’ve had no historic exposure to but over the last six months we’ve been increasing it,” Turnill adds.

The US, however, according to F&C’s Rubingh has a weaker dividend paying culture: “The large tax on dividends means these stocks tend to have lower yields. Lots of US companies try to redistribute capital by doing share buy-backs,” he says.

That said, there are a number of ‘dividend aristocrats’ in the US S&P 500 such as Coca-Cola, ExxonMobil, Procter & Gamble and McDonald’s that have had unbroken dividend payments for more than 25 years – showing there are still many opportunities in this area to invest in solid companies that give regular and increasing payouts.

Overheating

There is concern that dividend investing is becoming a crowded trade because of the amount of money flowing in and concerns that many companies are at the upper-end of their historical ranges.

However BlackRock’s Turnill believes this is not the case: “If you look at last year we generated strong returns and there is lots of momentum here compared to the broader equity market. But what critics meant was there lots of negative movement in the rest of the equity market. If you actually look at the returns they were primarily generated through the yield.

“Most of that return was through the dividend and the remainder of the return was through growth. There was no re-rating at all, so from a valuation perspective these stocks remain very compellingly valued.”

Where there really would seem to be crowding is in government bonds, and if you take a look across the capital markets that is where most money has been flowing.

BlackRock also points out in the report Means, Ends and Dividends that capital flows into actively managed US equity income funds still pale in comparison to overall flows into US taxable fixed income funds.

Investors put $20bn (£12.78bn) of new money into the first group in the first 11 months of 2011; compared with $120bn into the latter group, according to Strategic Insight (Chart 2, below left, shows the comparative fund flows into US equity and bond mutual funds).

Turnill thinks that over the whole market we have not yet seen the money move. He believes there is huge potential to increase returns in a risk controlled way by moving money out of low-yielding fixed income assets.

“That process has barely started and over the next few years this will be one of the major trends in the markets,” he says.

However, F&C’s Rubingh cautions that when trustees look at the viability of implementing this kind of idea, they must look at the position of the scheme and how much risk they can tolerate.

“Trustees should not view high-dividend-paying stocks as an alternative to fixed income instruments. They can supplement these instruments but it’s not the same thing in terms of the capital structure.

If trustees have a preference for dividend income with a good investment process they can tilt their portfolio to higher dividend paying stocks.”

As the hunt for yield goes on, the trend for income investing is set to continue. Quality dividend-paying stocks around the globe are proving very attractive for pension schemes that need a solid stable stream of income.

Barnett Waddingham’s Pocock believes this kind of investing harks back to the past.

“We seem to be moving back to where pension funds first started investing in equities,” he says. “At that point in time it was all about income, it’s only when we saw yields falling in the 90s and growth stocks coming through that the income focus was lost. It’s a trend we are moving back to.”

TABLE 1:

TABLE 2: