Why do UK companies pay high dividends?

sevenhills

Why do UK companies pay high dividends, only second place to Australia?

https://siblisresearch.com/data/global-dividend-yields/

tacpot12

I would say it is because the boards lack the imagination on how to spend their profits to grow the business.

Thrugelmir

Historically in other countries the tax regime plays an important part. If done correctly buy backs should result in capital gains. Which are taxed at a lower rate. 

Dividends are something tangible though. From a shareholders perspective. Cash is king. Financial accounts can be engineered. 

Buy backs now are a totally different discussion. Questionable in many cases as to who actually benefits. 

george4064

Adding to what precious posters have already said, few points to highlight. When companies make a profit, they have a few options as to what to do with those profits;

• Re-invest profits back into the business with the expectation/hope that revenue and profits will grow. This could be in general, or for something more specific like building a new factory to produce more goods.
• Return to shareholders, either via share buybacks or dividends. Companies tend to pay dividends when growth opportunities are not abundant, so hence why these may choose to pay a dividend rather than reinvest back into the business. Often you will find younger companies with higher growth prospects reinvesting back into the business, whereas larger more stable companies with lower expected growth will prefer to pay dividends.

Also, different countries often have different preferences around how capital should be distributed. Traditional the U.K. investor has a preference to dividends vs buybacks, whereas in the US it’s the opposite way round. Also tax rates also play a part in which option is the preferred.

Eco_Miser

UK investors like a steady income. Certainly those who are (partially) living off that income do.

The alternatives of selling shares as needed, or taking part in share buybacks result in having less shares, and therefore less future income.

steampowered

A large part of it depends on the industry sector.

The UK stock markets are overweight with oil & gas companies, miners and banks - all of which are sectors which tend to pay good dividends but lack in growth.

The US stock markets have a lot more technology companies which often don't pay a dividend at all but are growing at a rapid rate.

Malthusian

Eco_Miser said:

UK investors like a steady income. Certainly those who are (partially) living off that income do.

The alternatives of selling shares as needed, or taking part in share buybacks result in having less shares, and therefore less future income.

The first part is potentially true as part of the cultural explanation of why UK dividends are higher than in other stockmarkets.

The second part isn't. Selling shares does result in less future income but only to the exact same extent as a company paying dividends. If you own £1,000 worth of a company and it pays you a £40 dividend instead of reinvesting it in the business, it has exactly the same effect on your future income as if it had reinvested the dividend but you'd then sold £40 worth of shares (either to the company in a share buyback or a third party). If the dividend next year is 4% you forfeited £1.60 of future income either way.

A dividend is just a company moving some money you already own from a bank account you already own into a different bank account you already own.

thickasabrick

sevenhills said:

Why do UK companies pay high dividends, only second place to Australia?

https://siblisresearch.com/data/global-dividend-yields/

"The ROE Conundrum: Where Did The Shareholder Returns Go?" article by Mr Tako Escapes has a nice explanation of the elements of returns on earnings. Mentions dividends, bad share buybacks and bogus earnings numbers.
Why do UK based companies historically pay higher dividends ? I have no idea. Although I suspect it is based on treatment by the tax regime. 

LHW99

Malthusian said:

Eco_Miser said:

UK investors like a steady income. Certainly those who are (partially) living off that income do.

The alternatives of selling shares as needed, or taking part in share buybacks result in having less shares, and therefore less future income.

The first part is potentially true as part of the cultural explanation of why UK dividends are higher than in other stockmarkets.

The second part isn't. Selling shares does result in less future income but only to the exact same extent as a company paying dividends. If you own £1,000 worth of a company and it pays you a £40 dividend instead of reinvesting it in the business, it has exactly the same effect on your future income as if it had reinvested the dividend but you'd then sold £40 worth of shares (either to the company in a share buyback or a third party). If the dividend next year is 4% you forfeited £1.60 of future income either way.

A dividend is just a company moving some money you already own from a bank account you already own into a different bank account you already own.

All things being equal, dividends versus total return is two sides of the same equation - provided the companies in question can actually do something that sensibly increases the value of the company / support the dividend in question. There have been a lot of poor M&A uses of retained capital, which have not in the end increased the value of the original company, and plenty of cases where dividends have been maintained when they shouldn't. IMO an approach that uses "a bit of each" could provide a more reliable outcome.

Doshwaster

steampowered said:

A large part of it depends on the industry sector.

The UK stock markets are overweight with oil & gas companies, miners and banks - all of which are sectors which tend to pay good dividends but lack in growth.

The US stock markets have a lot more technology companies which often don't pay a dividend at all but are growing at a rapid rate.

You can add Big Pharma, utilities and property  to the list of sectors which are traditionally high dividend payers
Tech companies and manufacturing usually prefer to spend more money on reinvesting in product development and acquisitions to grow the business.

Eco_Miser

Malthusian said:

Eco_Miser said:

UK investors like a steady income. Certainly those who are (partially) living off that income do.

The alternatives of selling shares as needed, or taking part in share buybacks result in having less shares, and therefore less future income.

The first part is potentially true as part of the cultural explanation of why UK dividends are higher than in other stockmarkets.

The second part isn't. Selling shares does result in less future income but only to the exact same extent as a company paying dividends. If you own £1,000 worth of a company and it pays you a £40 dividend instead of reinvesting it in the business, it has exactly the same effect on your future income as if it had reinvested the dividend but you'd then sold £40 worth of shares (either to the company in a share buyback or a third party). If the dividend next year is 4% you forfeited £1.60 of future income either way.

A dividend is just a company moving some money you already own from a bank account you already own into a different bank account you already own.

Consider two very similar companies, both make an annual profit of 4%, every year for a long enough time with zero inflation (to keep the maths simple).

Company A pays a 4% dividend, company B reinvests its profits, to continue making a 4% profit on its increased valuation.

Every year you get £40 from company A, and still have £1000 of shares.

Every year you sell £40 worth of company B, because of that £1.60 that you didn't earn, but take anyway, you now have less than £1000 worth of shares, and each year that deficit compounds, meaning you run out of shares after 78 years. Alternatively, you can leave the £1.60 invested, and take less income.

The 78 years is for a 4% growth, it drops to 33 years for 8% and 24 years for 10%.

The two situations are not equivalent in the long term.

Edit: I had set up a spreadsheet to discover how long before you run out of shares, and apparently I had an off-by-one error in the formula, which caused me to see that compounding deficit. Actually the deficit just stays within the (increasing) price of a share, and doesn't compound.

However, you still have less shares each year, and must eventually run out.