Q3 earnings season is usually an uneventful period for UK income investors, but there is always plenty to consider as the year speeds to a close.
The first of these is the “direction of travel” for the financial year, which in many cases is three-quarters done; whether a dividend-paying company has had a profitable year is always a strong indicator of its willingness to pay out.
If this is the foreground for investors, the background is equally important at the moment: UK markets are relatively buoyant but Labour’s first Budget on Oct. 30 promises tax changes that will directly impact savers and investors.
Another factor, connected to rising markets, is share price appreciation. With just two trading months left in the year, it’s meaningful for income investors to start thinking about total returns and whether they match up with expectations at the start of the year. And in year when the broader UK market is around 10% higher so far, if the stock you own is above or below this, an investor has to wonder why. The majority of the stocks on our screen are above the market return
A handful of our high-yielding names have already updated the market.
• Imperial Brands IMB
• WPP WPP
• Lloyds Banking Group LLOY
• Reckitt RKT
• Unilever ULVR
Cigarette maker Imperial is the highest-yielding stock to report from our screen.
“The company continues to demonstrate its strategy to maximize free cash flow generation is working,” says Morningstar analyst Kristoffer Inton. He adds that the company continues to prioritize shareholder returns, boosting buybacks and increasing the dividend by 4.5%. It’s also moving towards quarterly payments from a six-monthly schedule weighted heavily towards the second half of the year. Shares are up a chunky 27% this year, leaving them fairly valued by Morningstar metrics.
Unilever has crept back in to our monthly screen because its dividend has nudged back above 3%. The quarterly dividend of EUR 0.4396 is the same as the previous quarter but 3% higher than the same period last year. Including dividends and share price gains, investors have enjoyed nearly 30% total returns this year, helped by falling inflation.
Lloyds Banking Group’s Q3 update revealed a dip in profits on the same period last year, and no “new” news on dividends because it has a semiannual payment cycle: the most recent payment was in September and the next is likely to be in May. The bank’s shares were on a strong run this year, but a recent ruling on car finance claims sent shares lower at the end of October.
Advertising firm WPP is also tied to the twice-yearly payment cycle, with a recent first-half dividend of 15p per share, unchanged from 2023. The company reported new business gains in Q3 and will pay its interim dividend on Nov. 1.
Consumer goods firm Reckitt Benckiser saw supply-chain problems in the third quarter but maintained its full-year guidance. Its dividend schedule is semiannual so the next payment is May 2025, following a dividend paid out in September 2024.
• British American Tobacco (November)
• WPP (November)
• Unilever (December)
British American Tobacco BATS is half way through its annual payment schedule, which involves 58.88p quarterly payouts in May, August, November and February.
Other companies on our screen yet to report are GSK GSK, Schroders SDR and BT BT.A. While BP BP. is not on our screen, it declared an interim dividend of USD 0.08, 10% higher than Q3 last year.
There was mixed news from Computershare on total UK dividends for Q3 in its latest dividend monitor. Payouts by UK companies reached £25.6 billion on a headline basis, which includes special/one-off payments. This was down 8.1% on the same period this year, a result of the pound appreciating against the dollar and euro this year, a greater reliance on share buybacks and lower payouts from the mining sector. Still, the forecast for 2024 is for a total payout of £92.3 billion from UK stocks, including specials, and that would be up 2% on 2023. Before the pandemic, which triggered a “great reset” of dividends, the total payout was more than £100 billion.
These are subject to change in Wednesday’s Budget, but for a bookmark, these are the current rules:
• No income tax on dividends within the £20,000 ISA allowance
• Outside of that the tax-free dividend allowance is £500, down from £1,000 in the previous year
• Tax-free CGT allowance is currently £3,000
Every month the best-performing UK and eurozone dividend stocks are revealed.
Methodology for Dividend Stock Screen
To make it on to our monthly list, FTSE 100 companies need now to have a Narrow or Wide Morningstar Economic Moat Rating, pay a dividend, and have a forward yield of 3% or more. This is below the Bank of England base rate, which still stands at 5%. We changed our methodology in 2022, introducing a hurdle of 3%
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
