Geffen says dividend growth could exceed 15% in 2011

Neptune founder and CEO Robin Geffen believes UK dividend growth could exceed the 15% consensus forecast next year despite the muted economic environment.

Geffen, the manager of the £1bn Neptune Income fund, says as the business community begins to feel more confident about economic growth prospects, company dividend growth could accelerate.

"The gap between UK gilt yields and the yield on the FTSE All Share has closed. The yield on a 10-year gilt rose from its low of 2.83% to 3.24%, bringing it in line with the FTSE All Share's estimated yield of 3.2%," Geffen says.

"However, this does not make equity income look any less attractive, with the next catalyst due to come from increasing expectations for dividend growth.

"This recession has been different from recent comparable events owing to the levels of cash on corporate balance sheets. Many companies are opting to return cash to shareholders.

"The average UK payout ratio is comparatively low, implying potential for dividend growth even in the absence of further earnings growth."

Geffen cites the UK water utilities as good examples of companies offering strong earnings visibility, a high yield and inflation protection.

"These companies have indicated dividend growth of up to RPI +4%. Valuations are now closer to historic averages with the stocks having returned circa 30% year-to-date," he says.

The manager also cites outsourcing services company Compass as a top dividend paying stock.

"Margin growth was achieved through cost cutting and finding efficiencies," Geffen adds. "The company reported a 33% increase in dividends, which is two times covered by earnings, signalling management's confidence about future prospects."