Dividend growth in UK companies will slow next year, meaning that investors will have to look outside the UK equity income sector if they are to maintain the increases in their income stream, according to the latest quarterly Capita Dividend Monitor.

The third quarter of the year saw the biggest pay-out to investors in UK market history of £78.6bn, with full-year expectations now revised up to £300m – growth of 15.6 per cent on the 2011 figure.

However, Capita estimates growth of just 3 per cent next year, warning that the huge special dividends seen this year are unlikely to be repeated.

It also reports that quarterly growth slowed to 10.4 per cent – its lowest since the fourth quarter of 2010 – although the total pay-out of £23.2bn was the largest ever.

Dividends have now grown in seven consecutive quarters, however, and the figure for the first three quarters of this year is higher than the entire annual payouts of 2007, 2009 and 2010.

FE Trustnet has previously reported on the growing investor appetite for global income funds as a way to diversify income streams, and Capita’s projections suggest this may be wise.

The slowdown is particularly apparent in the cyclical sectors, where growth slowed from 25 per cent on average in the first three quarters to 14 per cent in the third quarter.

Divided growth among defensives slowed from 8.3 per cent to 7 per cent.

The top five companies accounted for 37 per cent of the total paid out by the entire market in the third quarter – the lowest concentration of third quarter dividends since Capita began measuring in 2007.

Although this is below average, it demonstrates the massive dependence UK investors have on very few shares for all their income, and raises the question whether investors should be diversifying.

Tom Tuite-Dalton, analyst at Oriel Securities, says he expects the defensives sectors to be able to maintain their dividends more reliably.

However, he suggests Murray International as an investment trust that might appeal to investors worried about the UK figures who are looking to diversify their income stream, saying that it has a strong record of increasing dividends year-on-year.

Data from FE Analytics shows that the trust has made 280.71 per cent since Bruce Stout took over management in June 2004, more than doubling the returns of its IT UK Growth and Income sector.

Performance of trust versus sector since June 2004


Source: FE Analytics

It's stellar performance has not gone unnoticed, however, which is in part why the trust is currently trading on a premium of 11 per cent. Murray's portfolio is currently yielding 3.8 per cent.

Tuite-Dalton also likes the Law Debenture Corporation, which gets half of its earnings from a legal advisory business and also operates as an investment trust.

Performance of trust versus sector


Source: FE Analytics

The trust is currently yielding 3.35 per cent, but its premium of 8.3 per cent may put off some investors.

Large special dividends from Vodafone – £3.5bn –as well as BP and Shell - £3.2bn between them – drove headline dividend figures higher, while the miners distributed £1.8bn in the quarter.

Growth held up more strongly in the FTSE 100 companies than in the mid-cap FTSE 250, with growth rising 11.1 per cent in the former and 6.2 per cent in the latter.