Dividends from companies listed on the Alternative Investment Market (AIM) are set to reach £1bn for the first time before the end of the year, according to a survey by Link Asset Services.
The AIM Dividend Monitor survey analyses the dividends paid out by AIM stocks, the growth market dedicated to smaller and medium-sized companies listed in the UK.
AIM dividend growth has been particularly strong in recent years having tripled between 2012 and 2018 and with average annual growth of 18.6 per cent – compared with the 4.9 per cent annual growth rate for the main market in the UK (consisiting of much of the FTSE All Share and several other additions not in the index) – it is expected to reach a record £1.16bn in 2018.
On top of this, the stock market itself has performed well with data from FE Analytics showing that the FTSE AIM All Share has outperformed the FSTE All Share over one, three and five years. However, at 54.37 per cent, its 10-year figure is almost half that of the FTSE All Share.
Performance of FTSE AIM All Share vs FTSE All Share over 5yrs
Source: FE Analytics
Link Asset Services’ Justin Cooper commented that AIM is associated with young companies that are “hungry for capital to grow”, and rightly so.
“The value of capital being returned to investors via dividends is still much smaller than the amount being raised for investment, but the speed at which dividends are growing shows that more and more companies are coming of age and reaching that important milestone where they generate more cash than they absorb,” he said.
“It’s frankly astonishing to see such consistent and such dramatic growth year in, year out.”
He said there are three reasons for the strong dividend growth, the first and most important being that companies listed on AIM are maturing and so paying dividends is becoming more important to them.
Secondly, the companies that enter the AIM market are bigger in size and therefore tend to pay bigger dividends.
Thirdly, new companies on AIM are now paying dividends at an earlier stage than they used to.
Dividend paying in the UK is often associated with a small number of large companies listed on the FTSE 100, with energy companies such as Royal Dutch Shell and BP and banks HSBC and Lloyds being some of the largest distributors.
There is a growing concern in the UK market surrounding dividend concentration risk, where this small number of companies at the top are producing too high a proportion of dividends meaning investors are relying on the same stocks.
Indeed, according to the latest UK Dividend Monitor report for the second quarter of 2018, the top 10 dividend-paying companies in the main market accounted for more than 50 per cent of total dividends paid out.
Inversely, the top 10 dividend-paying companies on AIM paid out 24 per cent of total dividends in the AIM stock market in 2017. They included the likes of Highland Gold Mining, Redde, James Halstead, and Secure Income REIT.
Top 10 dividend-paying companies on AIM
Source: Link Asset Services
Octopus Investments head of small companies Richard Power said that people often underestimate AIM stocks’ abilities to pay dividends.
“Early-stage fledgling stocks are hungry for new capital, and so don’t tend to pay dividends, but there are hundreds more that are maturing steadily and beginning to generate cash, even after their investment needs are satisfied,” he said.
“Not only are their profits growing, which is supporting dividend growth, but they are increasing the proportion of profits that they distribute too.”
Power said that as a result, dividend growth on AIM is much higher than on the main market, where some companies have had difficulty growing their dividends recently.
James Henderson, manager of the Henderson Opportunities Trust, added that AIM is a very diverse market, meaning that there is greater divergence between stocks than the numbers suggest.
“At one end, there are hundreds of very small, very new companies right at the beginning of their lifecycle, and at the other there are some much larger, mature companies generating a lot of cash,” he said.
“Often, some of the bigger dividend contributors were formerly listed on the main market but got into difficulties. They raised new capital and stepped down onto AIM.
AIM dividends 2012-2019
Source: Link Asset Services
“These, like Johnson Services Group, and Scapa, were used to paying dividends before they joined AIM, and continued that custom once they were fully back on their feet.”
Henderson also said that the increased dividend pay-outs on AIM is partly due to the better corporate governance practices of the companies listed on the market.
Although an investor will rarely go to the AIM market in search of primarily an income, the manager said that there is no doubt dividends are becoming a larger part of the total return of investors operating in the market.