HSBC and Standard Chartered are the only UK banks set to pay significant 2009 dividends but currency changes should make losses less painful, according to a fund manager at London-based asset manager Newton.

“The loss of UK banking dividends in 2009 will be made up by the recent strengthening in the US dollar versus sterling. In 2009, 35 per cent of UK dividends will come from UK companies that report their earnings and declare their dividends in US Dollars,” says Tineke Frikkee, manager of the Newton Higher Income Fund.

Ms Frikkee says the currency move means that we will see more than 30 per cent dividend growth from UK companies such as Shell, BP and AstraZeneca.

She predicts that companies with strong balance sheets and relatively defensive earnings are also likely to deliver above inflation dividend growth in 2009 - such as GlaxoSmithKline, British American Tobacco, Pearson and Cable & Wireless.

These comments are a response to UK private bank Brown Shipley's comments quoted in media reports yesterday. Brown Shipley said that at least a quarter of FTSE 350 companies will be either reducing or scrapping their dividends over the next 12 months.

This will be disappointing for investors but Ms Frikkee believes it is unlikely to significantly affect the UK market's dividend growth as a whole.

“Dividends clearly become a more important contributor to total returns when capital returns are weak,” says Ms Frikkee.

A Citigroup strategy research report published last month also shows solid links between share price performance and dividend changes during the last five market downturns. Stocks that provided higher than average dividend growth tended to outperform.

“A higher than average dividend yield will provide downside support in this more challenging environment.  Dividend growth will not only significantly contribute to total returns, but also provide firm guidance to corporate growth prospects, cash flow generation and balance sheet strength,” says Ms Frikee.

The Newton Higher Income Fund only holds stocks with above average dividend yields. Only HSBC and Standard Chartered meet these conditions and both are in the fund. The fund had no HBOS, Lloyds, RBS or Barclays and therefore does not need to replace these dividends, Ms Frikkee told Wealthbriefing.

The fund is worth £2,380.42 million ($3,528 million), as at 31 September 2008.