The Covid-19 pandemic is causing chaos for FTSE 100 dividends. Housebuilders, banks, and now insurers have all suspended their payments, and there will surely be more. Today I’m looking at two dividends I think are at some risk. But they’re both companies I’d seriously consider buying.
Throughout the last oil price crash, BP (LSE: BP) maintained its dividend.
But it sold off assets and worked hard on its balance sheet, and maybe a dividend reduction would actually have been a good idea. Will it do that in the latest crunch, with oil down around $30 and demand crumbling?
Best FTSE 100 dividends?
FTSE 100 dividends are generally considered among the safest, and companies are very reluctant to cut them. But the PRA has stepped in and is urging firms to preserve their balance sheets. And that could make a significant difference to the way companies that do cut their dividends would look.
If BP went that way, people could see it as being economically and socially responsible, and not as a dividend-slashing pariah. I think the BP dividend is probably safe for now, but the risk of a cut seems far greater than last time.
The BP share price has dropped further than the index, down 29% so far in 2020. That pushes the forecast yield up to 9.5%, making it one of the highest FTSE 100 dividends that has not yet been cut.
If the payout is maintained, that’s an obviously attractive income prospect. But if, as might happen, FTSE 100 dividends are pared back further, share prices could give up their recent rally. And I do think the recent FTSE rebound is over-optimistic.
But if we see the further dips that I expect, I think it could make BP shares an even more tempting long-term buy.
Falling demand
Rio Tinto (LSE: RIO) offers another FTSE 100 dividend that has just been confirmed. The firm is to go ahead with its 2019 final payment, but I think the 2020 dividend could come under pressure.
With so many industries closed down, demand for metals and minerals is falling. And I think the coronavirus-led downturn could last longer than many folks think.
The Rio Tinto share price is down 18% since the start of the year, against the FTSE 100’s 25%. That does include a bit of a rebound towards the end of March, despite Rio telling us around the same time that it’s suspending or slowing some operations.
Cyclical sector
Is the relatively modest price fall a result of expectations that the dividend will be maintained? With 7% forecast, Rio doesn’t offer as big a potential payout as BP, but it’s still one of the best FTSE 100 dividends out there — for now.
I think the share price is likely to fall back again, for one of two reasons. I’ve already said I’m pessimistic about the FTSE 100 over the short term, and I do think a cut to Rio’s dividend is more likely than the market might expect.
But if you can stand the cyclical nature of commodities, Rio could still be a good long-term buy. It’s very tempting to buy on any future dips.
