Share prices may rise and fall but dividends nearly always grow

Amid a fresh bout of turbulence on the London Stock Exchange, investors may be reassured to know that growth in dividend payments is far more reliable than rises in share prices.

Dividend payments from the UK market have shown an annual increase in all but five years since the beginning of 1965, according to analysis by Fidelity International.

Annual increases in dividend payments ran into double percentage figures for almost half of the past 42 years, peaking at 24% in 1979. The golden period for dividend growth was the seven years between 1984 and 1991 when payouts rose by a minimum of 12% each year.

In the five years when aggregate dividend payouts failed to rise, the decreases were small in all but one year. The years were 1967 (-2%), 1993 (-1%), 1998 (-14% following a change to dividend tax credits that also hit pension funds), 2000 (-3%) and 2001 (-0.2%).

Long-term protection against inflation

In the majority of years, dividend growth exceeds inflation. The exceptions have been a bout of hyper-inflation in the mid-1970s that wiped out the real returns from double-digit dividend growth, the early 1990s and the early years of this decade if one uses the retail price index (RPI) as the benchmark for inflation rather than the newer consumer price index (CPI).

Cumulatively, however, dividends offer good protection against inflation. This is because in many years, dividend growth has outpaced the rise in prices several times over. In real terms, dividend growth peaked in 1984, when share payouts rose 21%, more than four times the 4.6% level of RPI at the year's end. Dividend growth has been at least twice the rate of inflation in 12 of the years since 1965.

The importance of dividend reinvestment is well-known. Anyone who invested £1,000 in the FT All Share Index ten years ago would today have a portfolio worth £1,040 - unless they reinvested the dividends. In this case, their portfolio would be worth £1,404. In real terms, assuming long-run inflation of 3%, the investment has retained its value.

Sam Morse, manager of the Fidelity MoneyBuilder Growth Fund, says: "It is well-known that any attempt to time the market is fraught with risk. This analysis underscores the point that even through the turmoil of the past decade, total returns from UK shares have held up well in both nominal and real terms, provided that you reinvested your dividends.

"I regard dividends as key to UK equity investment and I've always viewed dividend growth as a leading rather than lagging indicator of stock market out-performance. Companies that grow their dividends consistently each year without interruption generally out-perform the rest of the market. Encouragingly, despite the difficult backdrop, the consensus forecast for dividend growth in 2008 is 4%."