If sterling strengthens relative to overseas currencies, pressure will mount on these companies’ earnings, and consequently on their dividends.
One topic that will have a significant impact on the level of sterling is the possibility of a Brexit. This debate, which could last up to four years, will be a source of uncertainty for the currency. This lack of clarity could also weigh on sterling, a potential positive for firms with substantial overseas earnings.
Companies with strong business models, good management and high barriers to entry are often well-positioned to provide better, long-term dividend streams. However, in today’s slightly tougher environment for equity dividends, investors seeking income in the UK market can look beyond stocks and towards inflation-linked bonds.
Inflation should rise on the back of two factors: as a result of the base effects of the low oil price dropping out, and due to the impact of the government-mandated switch from the minimum wage to the new national living wage this year.
Although bond yields are low, these inflation-linked bonds are designed to counter the eroding effects of inflation as their income from coupons and redemption payments are linked to the Retail Prices Index. Therefore, a combination of dividend-paying equities and inflation-linked bonds is a good way to generate income in a portfolio while interest rates remain low.
Richard Marwood is manager of the Axa Distribution fund
UK DIVIDENDS: Q3 2015 NUMBERS
£27.2bn
Total UK dividends paid
30.8%
Headline growth in UK mid-250 company dividends
£2.9bn
Total dividends paid by mid-250 companies
Source: Capita UK Dividend Monitor, October 2015
