Revisiting The Case For UK ETFs As Dividend Destinations

The UK, essentially the second-best dividend market after the United States, could see payouts pinched, as some FTSE 100 companies struggle to generate cash to cover current dividends and boost those payouts.

With energy and materials names looking like the most egregious offenders, the FTSE 100, the UK's benchmark equity index, could see some painful dividend cuts in the coming months. As the Economist reports, the FTSE 100 sports a trailing 12-month dividend yield of 4.2 percent, more than double the comparable yield on the S&P 500.

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The iShares MSCI United Kingdom ETF (iShares Trust EWU has a trailing 12-month yield of nearly 4.4 percent. Home to a nearly 18 percent combined weight to UK energy and materials firms, EWU would appear vulnerable to some near-term dividend issues.

It's Not All Bad News

For EWU, there is some good news. Notably, oil majors Royal Dutch Shell plc (ADR) (NYSE: RDS-A) and BP plc (ADR) BP have yet to commit dividend transgressions this year. That is important because those stocks combine for over 12 percent of EWU's weight.

The better news for EWU and rival UK ETFs is that the long-term case for U.K. dividends is sound.

“However Markit Dividend Forecasting has identified 50 companies in the UK that are expected to deliver dividend growth of at least 10 percent in each of the next three fiscal years. 17 of the top 50 are FTSE 100 firms, and 18 are expected to grow above 15 percent per annum,” said Markit in a new note.

Markit highlighted the industrial, consumer staples and areas of the consumer discretionary sectors as groups that lead the UK dividend resurgence. That is relevant to EWU because those groups currently combine for over 37 percent of the ETF's weight.

Any talk of dividend cuts in the UK represents a stunning reversal from what global dividend investors have grown accustomed to with that market. Put simply, the UK has been the best ex-U.S. dividend growth destination in the world for several years. In 2014, UK dividends climbed 31 percent to $135 billion, according to Henderson Global Investors.

“Leading UK companies set to grow dividends is the world’s largest silver miner and Mexico’s second largest gold producer – Fresnillo. The company joins only two other Oil and Basic Resource companies expected to deliver above 10 percent dividend growth per year. Basic resource majors such as BHP, Rio Tinto and Anglos have slashed their dividend payments as demand for basic commodities continue to stagnate amid declining demand resulting in decade low prices,” added Markit.

Fresnillo is just 0.13 percent of EWU's weight.