How the UK Dividend Stocks Portfolio performed in 2024

Five long years have passed since the pandemic began, and yet its aftershocks are still ringing around the world, causing political and economic difficulties.

The good news is that those aftershocks are now much smaller than they were several years ago, but 2024 was still another tough year for the UK stock market and most UK companies.

As for the UK Dividend Stocks Portfolio, almost none of its holdings had anything positive to say about their operating environments last year, and those that did were benefitting from factors most would consider negative. For example, high interest rates supported higher profits for the portfolio's life insurers, and high energy prices supported higher profits from its energy suppliers.

Despite this difficult economic backdrop, most of the portfolio's holdings raised their dividends and although 2024 wasn't a year to remember, it wasn't a disaster either.

The portfolio's headline performance

As a quick reminder, the UK Dividend Stocks Portfolio has three main attributes:

1. Quality: The portfolio focuses exclusively on high-quality UK companies with long track records of strong profitability, consistent dividend payments and growth
2. Value: Stocks are purchased and held at attractive valuations, where the dividend yield is high and when there is a significant discount between the stock's price and its estimated fair value
3. Diversity: The portfolio has around 25 broadly equally weighted holdings operating across a diverse range of sectors and countries

The portfolio also has three performance goals. In order of importance, these are:

1. Income: A dividend yield higher than the FTSE All-Share
2. Growth: Dividend growth higher than inflation over ten years
3. Total return: Total returns ahead of the All-Share over ten years

Your performance goals may be different to mine, but whatever they are, it's important to remember that you should take them with a pinch of salt.

In other words, if you crush your investment goals over ten years, that doesn't mean you're a genius (although you may be). On the other hand, if you fail to achieve your goals over ten years, that doesn't mean you're an idiot (although, again, you may be). If only life and investing were that simple, but they aren't.

Goal 1: Dividend yield higher than the FTSE All-Share

The portfolio’s primary goal is to have a high dividend yield, and on that front, it’s firing on all cylinders, with a dividend yield of 5.4%. That's 50% higher than the All-Share’s 3.6% yield, and while a mere 1.8% higher yield might not sound like much, in practice it makes an enormous difference.

For example, put £1,000,000 into a portfolio yielding 5.4% and you'll get a £54,000 income, versus a £36,000 income from a portfolio yielding 3.6%. That sort of pay rise isn't to be sniffed at.

Perhaps more importantly, higher yields can massively reduce the capital needed to produce a given level of sustainable, growing income.

For example, if you needed to top up your state pension with an additional income of £1,000 per month, or £12,000 per year, you would need to invest about £220,000 into a portfolio yielding 5.4%. If your portfolio yields 3.6% (like the FTSE All-Share), you'd need about £330,000. That's more than £100,000 of extra capital required to produce the same income, which would probably take many more years to accumulate.

So, although these differences in yield may seem small, their impact on your retirement income and retirement date can be surprisingly large. 

Goal 2: Dividend growth higher than CPI inflation over ten years

Thankfully, savers can now get a decent income from virtually risk-free savings accounts, with Hargreaves Lansdown's Active Savings account currently offering interest rates of around 4.5%. That doesn't quite match up to the portfolio's 5.4% yield, but it's close. However, the income from a savings account doesn't grow with inflation, so the real-world purchasing power of those interest payments will inevitably shrink each year.

That isn't the case with dividends. Quality dividend stocks reinvest some of their earnings back into the business, funding the growth of their assets, revenues, earnings and dividends, in most cases ahead of inflation. Of course, dividend growth isn't guaranteed, but it is very likely if you own a basket of quality dividend stocks.

In 2024, the portfolio’s annual dividend increased by 3.8%, ahead of inflation at 2.6%. That's good news, but dividends can be volatile from one year to the next, so you'll get a better idea of how your portfolio is performing if you look at its dividend growth over a longer timeframe.  

For example, since 2012, the portfolio's annual dividend has increased by 46%, while inflation has increased the price of consumer goods by 39%. On the other hand, the income from a fixed-interest savings account wouldn't have increased at all over those 12 years.

As a general rule, I think investors should focus on returns over ten years or longer, as performance over one, three or five years can be misleadingly volatile. 

Over that ten-year time horizon, the portfolio's dividend has grown slightly slower than inflation, by 2.2% per year (on average) versus inflation of 3.0%, but I don’t see this as a major issue because we've had abnormally high inflation over the last three years.

In the short term, high inflation pushes up corporate expenses, which means lower profits and smaller dividend increases (or even dividend cuts) for investors. However, quality companies have pricing power, so eventually they'll be able to push up the prices of their products and services, and that will lead to higher revenues, profits and dividends.

Although it might take another year or three for the recent inflation spike to fully work its way through to significantly higher dividends, a year or three should be nothing to a patient long-term dividend investor.

Goal 3: Total returns higher than the FTSE All-Share over ten years

In addition to the primary goals of producing a high dividend yield and inflation-beating dividend growth, getting a decent total return is also an important goal (especially for those who are still building up their retirement assets).

From its inception in 2011, the portfolio’s annualised total return is fractionally ahead of the FTSE All-Share’s, at 6.5% per year (on average) versus 6.4%. Both are slightly behind the 7% long-term average total return from UK shares, and that’s understandable as we’ve been working our way through a pandemic and its aftershocks for five long years.

Over ten years, the portfolio is slightly behind the All-Share, with annualised total returns of 5.4% versus 6.2% from the index, but (again) I don’t see this as a major issue.

Much of that underperformance has been driven by the portfolio's higher weighting to UK-focused businesses compared to the more internationally focused FTSE All Share. As I'm sure you're aware, the UK has been very out of favour with investors over the last few years. That negativity has left many UK-focused stocks trading at very low valuations, and while that has helped the portfolio maintain its high yield, it hasn't been good for capital gains and total returns.

The portfolio also suffered from some stock-specific issues in 2024, which led to one dividend cut and two suspensions. Poor decisions by the UK's financial regulator (the FCA) led to a suspended dividend at Close Brothers (a leading UK merchant bank) and a dividend cut at holding, while poor management decisions led to a suspended dividend at Burberry.

As a dividend investor, I'm never going to be happy with a dividend cut or suspension, but the fact is that bad things will occasionally happen to wonderful businesses, which is why diversification is so important, no matter how high the quality of your holdings.

Ultimately, as long as a portfolio's annual dividend continues to go up over time, a similar degree of capital gains will inevitably follow, although the timing of those gains will always be uncertain.

Performance of the individual holdings

Looking beyond the portfolio's overall performance, there was a fairly wide range of outcomes at the individual holding level.

Sixteen dividend raisers

Out of 24 holdings, 16 raised their interim or full-year dividends in 2024, and that’s a decent majority given that the UK and global economies are still suffering in the wake of the pandemic.

Three holdings managed double-digit dividend increases, and while that looks impressive, they were just reversing dividend cuts caused by the pandemic.

The highest progressive dividend rise came from Legal & General, which cranked out yet another 5% increase, while three holdings increased their dividends by about 4% and five raised their dividends by about 3%.

Bringing up the rear, British American Tobacco and two other holdings managed sub-inflation rises of around 2%, while Direct Line reinstated its dividend, having suspended it in early 2023 when the motor insurance industry was knocked sideways by double-digit claims inflation.

Five dividend holders

Five holdings held their dividends flat and these were, unsurprisingly, all cyclical businesses.

Two media and advertising holdings had a tough year, as clients reduced their advertising budgets during this seemingly never-ending downturn.

Two industrial holdings suffered a similar fate when demand for their products fell because customers were cutting costs by running down their inventories.

Last but not least, Schroders also held its dividend flat, as it faced headwinds from the rise of passive investing as well as pension funds moving assets to life insurers like Legal & General.

Three Dividend cutters

Bringing up the rear, there were three dividend cutters.

As I've already mentioned, the UK motor finance industry has been seriously impacted by regulatory and legal decisions, with the regulator looking to uphold millions of compensation claims for so-called “secret” commissions paid to car dealerships. This matter is now with the High Court and the potential compensation bill could be huge. Very sensibly, Close Brothers suspended its dividend, while the portfolio's other motor finance firm merely cut its dividend, as it may be facing a smaller compensation bill.

To my surprise, Burberry also suspended its dividend in 2024. In my opinion, the CEO was largely to blame, and he’s been replaced with a new CEO who has already introduced a revised strategy. I still think Burberry is a fantastic business, so I expect this suspension to be short-lived.

Overall, I think this was a good performance from a collection of (mostly) exceptional businesses operating in very difficult conditions.

How the portfolio changed in 2024

In 2024, four companies joined the portfolio and three left. There were also ten rebalancing trades (either trimming positions that had grown too large or topping up positions that had become too small), taking the total number of trades to 17. 

I think that's too much activity for what should be a relatively low-effort investment strategy, so during the year I introduced a new rule:

• Rule of thumb: Only make one trade, at most, each month

This rule is designed to allow the investor to focus, each month, on the one decision that will have the biggest positive impact on the portfolio.

That one decision could be to add a new holding, or to sell, trim or top-up an existing holding. Sometimes, the best decision will be to do nothing, and there's nothing wrong with a little inactivity now and then.

Here's a quick summary of each company that joined or left the portfolio in 2024.

January - Bought a tobacco stock

When I added this stock to the portfolio, the share price was 50% below its all-time high and the dividend yield was over 8%. This combination of high defensiveness and high yield is exactly what I’m looking for. This stock is already up about 50%, but as I've said many times, it's a mistake to focus too much on short-term "paper" gains (or losses).

February - Bought a utility stock

This utility company has a near-perfect record of steady growth over decades, and it joined the portfolio when its dividend yield was above 5%. Again, this is in the sweet spot between defensiveness and high yield.

May - Bought Burberry

• Burberry purchase review

Burberry is an outstanding business with a long track record of progressive dividend growth, but thanks to a series of mistakes, its dividend was suspended and its CEO resigned shortly after it joined the portfolio.

Fortunately, the new CEO’s updated strategy will focus on products that are quintessentially Burberry and British, which I think is the right approach, and I don’t think the dividend will stay suspended for very long.

September - Sold Next

• Next sale review

Next is perhaps the UK’s best clothing retailer and this investment, which ran from 2016 to 2024, is a great example of a successful dividend investment. In 2016, investors were worried about Brexit and Next’s shares were trading at £50 with a yield of 3.2%. After it joined the portfolio it continued to grow, and growing investor optimism eventually pushed the share price over £100 and the yield below 2%. At that point I sold, locking in a 15% annualised total return.

October - Sold Headlam

• Headlam sale review

Headlam was a legacy stock from a time when my Quality standards weren’t as high as they are today. Headlam was sold at a loss, but the proceeds were recycled into other companies that are more appropriate for a defensive dividend portfolio.

November - Sold Hargreaves Lansdown

• Hargreaves Lansdown sale review

Unfortunately, HL was torn from the portfolio’s grasp, at too low a price, by a private equity takeover. This has become far too common as UK stocks remain materially undervalued, so the government and the FCA need to make sensible changes to boost the UK’s stock market and share prices.

December - Bought a UK manufacturing stock

The proceeds from HL were recycled into an exceptional manufacturer with a long track record of progressive dividend growth and an attractive yield of more than 4%.

These regular but small adjustments repeatedly nudge the portfolio towards higher-quality stocks with higher yields and more attractive valuations, much like an auto-pilot system nudges an aircraft towards its desired destination.

At the end of the year, I was pleased with the portfolio's overall composition, with almost all holdings meeting my Quality and Value criteria (as detailed in this Dividend Investing Checklist) and with the portfolio meeting my company, sector and country Diversity criteria.

Summary and outlook for 2025

In summary, 2024 was another difficult year for most companies, but I was generally pleased with the way the portfolio and its holdings coped with these ongoing headwinds.

The consensus from the Bank of England and others is that 2025 will be better than 2024, economically speaking, and I hope they're right. But as a long-term bottom-up investor, I'm looking for companies that can maintain or grow their dividends regardless of the economic environment, so economic forecasts aren't something I pay much attention to.

Instead, I'm mostly hoping that the U.S. stock market bubble bursts sooner rather than later, as that might entice UK investors to funnel more of their capital into the undervalued UK stock market, which would support UK share prices and the UK economy.