Dividend warning for DIY pension investors

Investing

Income investors cannot count on another year of booming dividends as corporate profits get squeezed by rising interest rates and falling consumer spending, new analysis has warned.

Last year dividends paid to shareholders soared by more than 8pc globally – but for 2023 they are forecast to rise by barely 2pc.

Many pensioners living off their “drawdown” accounts rely on dividends from their investments to generate an income in retirement, while others reinvest the dividends with the aim of growing their returns.

Last year, thanks largely to rising energy prices, investors enjoyed sharp increases in regular dividends, as well as substantial one-off “special dividends”, as soaring profits drove up oil and gas companies’ payouts by two thirds.

But the days of bumper payouts are about to come to an end, according to a report from Janus Henderson, an asset manager.

Globally, dividends soared 8.4pc in 2022 to hit a record-breaking $1.56 trillion, according to Janus Henderson. Underlying growth was even higher at 13.9pc once adjusting for the strong dollar and special dividends.

But this year, it forecast dividends will grow by just 2.3pc in 2023, and 3.4pc on an underlying basis.

Jane Shoemake of Janus Henderson said: “Inflation, the extent of further rate hikes, and geopolitical risks all cloud the horizon. Corporate cash flow will come under pressure both from lower levels of demand and from the higher cost of servicing loans, limiting the scope for dividend growth.”

The outlook for dividends in the UK also looks gloomy.

Stock market analysts are hopeful that UK dividends will rise by 9pc in 2023, according to estimates compiled by the Institutional Brokers' Estimate System.

But Janus Henderson thinks this is too optimistic. “We think UK dividend growth of 2pc to 5pc is more realistic, with dividend growth from the banks and oil companies offset by lower mining dividends,” Ms Shoemake said. This will leave regular UK dividend payments about 10pc lower than the pre-pandemic high reached in 2019.

But British investors still have a chance of finding decent dividend growth – provided they look in the right places.

“Among financials, banks may benefit from wider [profit] margins, thanks to the higher interest rate environment, so further dividend growth is certainly possible, subject to prudent planning for rising levels of bad loans as economic growth slows,” Ms Shoemake said.

Energy companies are expected to grow their dividends as well – though investors are warned the increases will not be as dramatic as in 2022.

However, there are some sectors where payouts are likely to be cut. “We expect mining dividends to be lower given commodity price moves and also think that housebuilder dividends may come under pressure,” said Ms Shoemake.

Special dividends, which rose in 2022, are also expected to fall.