FTSE 100 companies are cancelling dividends. Here’s how I’m investing now

FTSE 100 stocks’ dividends are becoming less reliable as the economy slows. But investors can still come out ahead. Here’s how.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 increased by over 9% yesterday. This was encouraging for investors, who’ve been hit by the ongoing stock market crash. At time of writing, index levels look elevated in today’s trading as well. But not everything’s quite all right. In response to business disruptions caused by the spread of the coronavirus, companies are cancelling dividends

Getting risk averse

This is disappointing, of course, if I’m an income investor. But I do think that the investor can still make good investing decisions today and end up ahead.

To start with, I’m identifying FTSE 100 companies that are most likely to cancel dividend payouts. I’d stay away from them for now. These are likely to be companies that are hit hardest by Covid-19. For instance, companies in sectors like travel, transportation, and hospitality are the most obvious hits because of the lockdowns, as well as retail other than grocers. 

Next are cyclical stocks. As the overall economy weakens because of the lockdown, cyclical stocks will become increasingly vulnerable. Banks, real estate, and automotive stocks would be instances of this. In fact, in this very particular situation, they are also hit by the disruptions to business hours, winding down of construction activity, and temporary factory closures, respectively.

Seeking dividend dependability

But there are still FTSE 100 stocks that look appealing despite the environment of gloom and doom. The first set are ones that are likely to show dividend continuity. I’m most inclined towards those that have a long history of paying dividends. It would be a bigger departure from the beaten path for them than for companies that have pulled back during recessions in the past. This would likely make a dividend change a harder decision for management. 

Focus on FTSE 100 growth stocks

I think it may be a good idea to look at investing strategies other than dividend investing alone. Growth investing can be rewarding too in the long-run.

Plenty of FTSE 100 stocks are trading at relatively low levels. One example is the FTSE 100 pharmaceutical giant AstraZeneca (LSE: AZN). It has a rising share price trend over time, which is encouraging for a long-term investor. Its prices have cooled in the recent weeks to levels seen early last year, making it a good opportunity to buy. It does still have a high price to earnings (P/E) ratio of 65.6 times, but going by past trends, it might not decline anytime soon. Its share price has already started inching up. In other words, the high P/E is just the value that investors put on AZN, the way I see it. 

As a defensive stock, I also like that it’s not as affected by economic conditions as some others. According to a Financial Times report, it has flagged that the coronavirus crisis could impact its growth, but its financials are still expected to look quite healthy. FTSE 100 consumer defensives like Unilever and Diageo are also attractive right now. Even though they offer muted dividends, they can make up for it with capital gains overtime.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended AstraZeneca and Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »