Total UK dividends shrank 3.7% in 2023 due to lower special dividends and a preference for share buybacks, and 2024 is expected to see slower growth than in the last three years due to lower contributions from the banking and energy sectors.
According to the Dividend Monitor report from Computershare, normal UK dividends rose 5.4% to £88.5 billion, helped by growth of 15.6% in the fourth quarter.
However, the total eased to £90.5 billion, both due to a £7.5 billion decline in one-off dividends and a rebound in the pound that reduced the sterling value of dividends declared in US dollars.
Banks restoring dividends after the pandemic were a key provider of income, with HSBC Holdings PLC (LSE:HSBA) the largest payer, a position it has not occupied since before the 2007/8 global financial crisis.
As interest rates rose and profits margins widened for the banks, the sector raised their payouts by almost third on a headline basis, with £13.8 billion paid out. This represented 15% of all UK dividends, up from an average of just 11% between 2009 and 2022.
Oil & gas giants paid the second-largest dividends in 2023, totalling £11.6 billion, with the sector having reset dividends to a much lower level during the pandemic but getting a massive boost from high energy prices following the invasion of Ukraine.
Shell PLC (LSE:SHEL, NYSE:SHEL), for example, has doubled its quarterly dividend since mid-2020, though remains below its high of four years ago as the company has shifted towards large share buybacks. BP PLC (LSE:BP.) is also moving increasingly on share buybacks.
Miners dropped back to third place in 2023, having been the top payer the previous two years, with a headline decline of 28.4% in 2023.
Mining payouts were still more than five times larger than their low point in 2016, the report noted, reflecting the strong cyclicality of the sector.
For 2024, the report said banks are expected to continue paying out well, but the upside from both banking and oil compared to last year will be smaller, while mining payouts are expected to continue their decline.
Sectors such as healthcare, food, drink and tobacco should show growth that is "steady but slow".
Underlying dividend growth is expected to decelerate to 2.0% this year on a constant-currency basis, while a special dividend promised by HSBC off the back of a Canadian deal should mean higher special dividends and a total rise of 3.7% year on year.
Computershare's Mark Cleland called banks' return to prominence among dividend payers "really remarkable" after 13 years of rock-bottom interest rates.
"Bank investors are reaping the dividends of this reversal and we expect them to see even larger payouts in 2024."
Cleland added: “UK plc is generating a lot of cash, which means underlying dividend growth was very encouraging in 2023.
“Payouts may well remain below their pre-pandemic highs, but significantly larger share-buyback programmes have provided an alternative route for channelling surplus capital to shareholders. These programmes also conceal the extent to which dividends are really growing by reducing the number of shares in issue. This is not to say that either buybacks or dividends are superior – they just represent a different way of cutting the cake.”
David Smith, portfolio manager at Henderson High Income Trust PLC (LSE:HHI), said his team also expects further dividend growth from banks in 2024, as the rise in profits from higher interest rates has yet to fully flow through to earnings.
Despite banking dividends now being better covered by earnings and strong capital positions in the sector, Smith noted that dividend yields are still high, "offering income investors an attractive opportunity given we believe those dividends should be sustainable absent a severe recession in the UK".
James Lowen, senior fund manager at the JO Hambro UK Equity Income fund, also sees dividend strength this year in oil, banking and insurance but forecasts a "flattish" outturn for dividend growth this year, in part due to many boards preferring share buybacks.
"In respect of boardroom frustrations around low UK equity valuations, a notable trend is emerging, with companies resorting to share buybacks to address the challenge," he said, particularly in sectors such as banking.
Some boards have even pivoted entirely to this approach, he noted, such as Vistry, which last year maintained a 2x payout ratio through a buyback instead of a dividend.
He said his own fund's dividend forecast incorporates a shift towards lower dividends and increased buybacks from 2024, which he said signified a "short-term dip" but that higher returns are projected in the medium term.