/ HENDERSON /
Given the amount of sales and profits earned overseas by UK listed companies , a significant number pay their dividends in overseas currencies ( mainly US dollars ). These tend to be the larger companies and they account for 45 per cent of total UK dividends paid last year . The value of these dividends paid in overseas currencies from UK listed companies has risen in sterling terms as a result of the fall in the pound . According to the strategy team at Baden Hill Sanlam , a research provider , ordinary dividends for the UK ’ s FTSE All Share index rose by 4.2 per cent in 2016 over the previous year . However , without the currency devaluation , total dividends would have fallen by around 1 per cent .
The other key factor that underpins greater confidence in UK dividends is the recovery in the prices of commodities ( physical goods such as oil , gold or wheat ). Metal prices rose in 2016 with better than expected economic growth in China . Mining companies are likely to restore dividends in 2017 which had been cut in 2016 . The oil price benefited both from global growth and also from the determination of OPEC to restrict some supply of oil production . BP and Royal Dutch Shell ’ s dividends are considerably more secure , with the oil price at over $ 50 a barrel when compared with below $ 30 a barrel reached in the first quarter of 2016 .
City of London Investment Trust , which I have managed since 1991 , is predominantly invested in UK equities and has grown to have assets of £ 1.36bn ( at 31 December 2016 ). While we have large holdings in BP and Royal Dutch Shell , we have less than the average for the UK indices given their sensitivity to the oil price and the risk of having too much in any one stock . This was well illustrated in 2010 when the Macondo oil spill caused BP to temporarily stop paying its dividend and made it liable for large fines in the US .
City of London ’ s portfolio is diversified with investments in 117 companies ( at 31 December 2016 ), including those in sectors such as
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The fall in the pound is beneficial for UK shares because around 70 per cent of quoted UK companies ’ sales come from overseas telecommunications , consumer staples , financials and housebuilders . As an investment trust , it has the ability to retain up to 15 per cent of its income in any one year , building a revenue reserve which can be used to support its dividend during difficult years when there are dividend cuts across the market . Though not a guide to the future , this has enabled it to grow its dividend each year for the last 50 years , the longest of any vehicle in the UK .
All in all , the UK equity market is offering a dividend yield of 3.4 per cent * ( FTSE All Share index ) which is attractive relative to the main alternatives such as 10 year gilts ( or UK government bonds ) yielding 1.35 per cent * or bank deposit rates , anchored by the UK base rate at a paltry 0.25 per cent ( * source : Financial Times 19 January 2017 .) While equities are inevitably more volatile than other asset classes , the income attraction of UK equities is currently considerable . This may give comfort for the patient investor in the context of the many political and economic uncertainties .•
EXCHANGE RATE OF POUND STERLING VS US DOLLAR
1.1
1.5
1.4
1.3
1.2
1.1
1
Jan16
Mar16
Source : Bloomberg ; as at 24 Jan 2017
May16
Jul16
Sep16
Nov16
• The above example is intended for illustrative purposes only and is not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy .
• Past performance is not a guide to future performance .
• The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested .
• Nothing in this document is intended to or should be construed as advice and you should satisfy yourself as to its suitability and the risks involved , you may wish to consult a financial adviser .
• This document is not a recommendation to sell or purchase any investment . It does not form part of any contract for the sale or purchase of any investment .
• Issued in the UK by Henderson Investment Funds Limited ( reg . no . 2678531 ), incorporated and registered in England and Wales with registered office at 201 Bishopsgate , London EC2M 3AE , is authorised and regulated by the Financial Conduct Authority to provide investment products and services .
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