Companies quoted on AIM are expected to match the dividends paid out before the pandemic, marking the first UK market to achieve the feat, according to the Octopus Investments’ Dividend Barometer.
The FTSE AIM will deliver total cash pay-out in 2023 of £1.3bn, around 22.4% more than it did in 2018, with an increased pay-out per company.
It is a sign of optimism for UK income investors who may benefit from moving down the market capitalisation spectrum. Indeed, the report noted that all small and mid-cap indices compare favourably against the FTSE 100, which is expected to increase its total dividend pay-outs by 17.3% in 2023 but remain 14.7% lower compared with its 2018 total.
As established companies with limited growth opportunities dominate the FTSE 100, they tend to pay out the majority of their profits rather as dividends rather than reinvesting them. This leads to lower level of growth.
The large-cap index remains the main area for dividend yield, with the FTSE 100 expected to pay out around 3.9% this year. However, the FTSE Small Cap and FTSE 250 (ex-Investment Trusts) should be on its tail, with dividend yield of respectively 3.8% and 3.4%.
Companies on AIM are yet to catch up, with expected dividend yields of 1.7% for 2023. Yet, while the yield is lower, the growth of dividends is rising.
Another ace up its sleeve with dividend cover, a measure that shows the amount of profit a company has available to meet its obligations to pay shareholders a dividend. It is of particular importance for income investors.
Octopus Investments forecasted that the average dividend-paying company on AIM will have cover of around 3.5x. Cover below 1.5x can put a stock at risk of reducing or postponing a dividend, as it means less flexibility to continue paying a dividend if profits fall.
None of the FTSE indices should fall below this threshold this year, said Octopus Investments, which expects the FTSE Small Cap (ex IT) to increase its cover to 2.5x, the FTSE 250 to 2.4x and the FTSE 100 to 2.4x.
The UK large-cap index’s cover fell below the 1.5x threshold during the middle of the past decade, but it bounced back to 2x when dividends were reinstated following the Covid-19 pandemic.
Also in favour of the minnows is stock concentration. The FTSE 100 is a highly concentrated index, with its top 10 payers responsible for 55% of the dividends spread across a narrow range of sectors such as banks, resources, tobacco and healthcare.
The FTSE AIM has the second largest concentration, with the top 10 cash pay-outs accounting for 31% of total dividends. Octopus Investments said that this level of concentration is due to the size skew within AIM, with many of the largest stocks within the index being large cash payers.
The FTSE 250 (ex-Investment Trusts) and FTSE Small Cap (ex-Investment Trusts) offer the largest breadth of opportunities for a diversified portfolio with lower concentration.
For instance, the top 10 dividend payers in the FTSE 250 (ex-Investment Trusts) account for 21% of total pay-outs. This is the lowest concentration among all the FTSE indices.
The FTSE Small (ex-Investment Trusts) also offers opportunities spread across a wider range of sector, with its 10 largest cash payers representing 26% of the index’s pay-outs.