UK DIVIDENDS went backwards in the third quarter and are likely to grow by no more than 1.7 per cent this year, according to the latest UK Dividend Monitor from Capita Asset Services

UK DIVIDENDS went backwards in the third quarter and are likely to grow by no more than 1.7 per cent this year, according to the latest UK Dividend Monitor from Capita Asset Services

Underlying dividends declined by 2.9 per cent, depressed by the strong pound, weak corporate earnings and a sluggish global economy.

Justin Cooper, chief executive of Shareholder Solutions, part of Capita Asset Services, said: "We always expected 2014 to be a year of slow growth for dividends, but it's rapidly turning into a year of no growth.

"In real terms, underlying dividends paid are going to fall this year.

"Much of it is due to global factors which have overshadowed the strong recovery the UK economy is enjoying."

It extends an ongoing trend of slowing dividends that began three years ago.

FTSE 100 dividends fell 1.1 per cent in the third quarter, compared to a 7.6 per cent increase from the mid-cap FTSE 250, reflecting the greater exposure of smaller companies to a more robust UK economy.

At an underlying level mid-caps grew dividends by 16 per cent, with consumer service companies up some 26 per cent year on year.

But Mr Cooper said the mid-cap dividend pool was "too small for the big fish among investors who need to retain significant exposure to the large-cap firms which are doing less well at present".

A sharply lower dividend from a newly downsized Vodafone made the biggest dent in the quarterly total (after a world record payout in the first quarter on the sale of its US business), but the third quarter saw the weakest underlying growth in more than two years.

Capita has reduced its 2014 headline dividend forecast to £97.1 billion and expects underlying dividends to reach £79.3bn, up 1.7 per cent. But its preliminary forecast for 2015 is for underlying payouts to total £83.7bn, up 5.5 per cent.

Mr Cooper said: "2015 should be much better.

"A lot hinges on the fortunes of the pound and on current trends there is some respite on the horizon.

"Most important will be the performance of company earnings. Until those begin to flow through more strongly, it will be hard for dividends to make more rapid progress."

The report notes that around two-fifths of the UK's annual dividends are declared in US dollars, and though the pound remains strong against the euro it has begun to fall against the dollar,

"The current rate, if it persists, is low enough to provide a boost to dividends next year, but only a small one." Capita estimates this will kick in from the second quarter.

Capita said that while 12-month yields on equities had dropped to 3.9 per cent on the back of the weaker dividend outlook, 10-year gilt yields were down to 2.45 per cent, property rental yields down to 3.5 per cent, while cash deposits earned just 1.5 per cent.

"For an income investor, equities are therefore still providing a superior yield."