British Petroleum effect knocks dividends

The 15 biggest UK companies in terms of market value were responsible for around two-thirds of total dividend payments

With savings rates so low investors may be tempted to turn to the stock market and the juicier returns it potentially offers.

The example of BP, though, underlines why pay-outs from shares often exceed those from other forms of investment; they are not guaranteed.

In every quarter of 2009, BP paid a dividend of 14 cents per share, and the pay-out record looked likely to continue in 2010 when the company announced a replacement cost profit of $5.6bn for the first quarter. 

That profits announcement was made a week after the Deepwater Horizon drilling rig in the Gulf of Mexico exploded and the company subsequently deemed it wise to suspend dividend payments until it has a better idea of its liabilities from the oil spill.

The removal of what seemed like a rock solid income stream is one of the reasons why UK dividend pay outs are set to fall by 6.5% in 2010, according to the latest Capita Registrars Dividend Monitor.

In the first half of 2010, UK quoted companies paid out £28.6bn in dividends, down 5.4% from £30.3bn in the first half of 2009. Payments over the whole of 2010 are projected to be £54.6bn.

The 15 biggest UK companies in terms of market value were responsible for around two-thirds of total dividend payments, so the decision by one of the top 15 to cancel dividend payments was bound to hurt. It reinforces the advice most financial advisers give, which is to spread the risk when building a portfolio.

The first half figures seem to support this strategy, with the number of companies that paid any sort of dividend in the first half of this year 39 higher than in the first half of last year. The number of companies that increased their pay-out rose to 189, double the number that cut or cancelled them.

Focusing on the UK's top quoted 100 companies, total dividend payments were down 8.3% from a year earlier. Even with BP taken out of the equation, dividend payments from Britain’s blue-chip companies were barely changed from a year earlier in the first six months of the year.

The trend was better among second-tier companies. Distributions to shareholders from companies in the FTSE 250 index – the next division down from the FTSE 100 – were up 24% year on year in the first half of 2010 as concerns about the need to conserve cash receded.