It’s fair to say the outlook for FTSE 100 dividend investors has changed dramatically in recent months due to Covid-19. Only a few months ago, investors could rely on well-established FTSE companies to provide them with a steady stream of dividends. And the yields – which were often 5%, or higher – were excellent.
Today, however, the situation is very different. Over the last few months, over 40 companies in the FTSE 100 index have suspended or cancelled their dividends, due to Covid-19 disruption. Meanwhile, plenty of other companies have reduced their payouts.
There’s been plenty of big-name casualties. For example, oil major Royal Dutch Shell, which hadn’t cut its dividend since World War II, recently cut its quarterly payout by a huge 66%. Meanwhile, income favourites, such as Lloyds Bank, Barclays, BT Group, and Aviva, have all suspended or cancelled their payouts.
This suggests to me that dividend investors now need to be much more selective with their dividend stocks. The days of being able to hold a struggling, debt-laden FTSE 100 company, such as BT Group, and pick up a big 5%+ yield look to be over.
So, what’s the best way to build a dividend portfolio now then?
Building a FTSE dividend portfolio today
If I was putting together a dividend portfolio today from FTSE stocks, I’d focus predominantly on high-quality businesses. Specifically, I’d look for companies that:
-
Have genuine long-term growth prospects
-
Strong competitive advantages
-
Aren’t highly cyclical, meaning they’re able to generate relatively consistent profits and cash flows throughout the economic cycle
-
Aren’t drowning in debt
-
Have a dividend growth track record of at least five, if not 10, consecutive dividend increases
-
Have a dividend coverage ratio (the ratio of earnings per share to dividends per share) of at least 1.5
High-quality businesses
Finding these types of companies isn’t easy. But I’ve highlighted a selection of FTSE companies that generally meet this criteria:
-
Unilever
-
Reckitt Benckiser
-
Diageo
-
Sage
-
Prudential
-
Smith & Nephew
Note that none of these companies offer a huge yield. The average among them is about 2.7% (still relatively attractive, compared to the abysmal interest rates on savings accounts).
Yet what they do all offer is reliable dividends. And that’s what you want as a dividend investor.
Not one of these companies has suspended, cancelled, or trimmed its dividend in the wake of the coronavirus disruption. That’s impressive. There’s no guarantee they won’t cut them in the future, of course but, in my view, there’s a relatively low chance of that happening.
I’ll also point out that all of these companies have the potential to deliver dividend growth going forward. That’s a real plus, as dividend growth tends to lead to healthy total returns (capital gains plus dividends) over time.
The key to dividend investing
So, that’s how I’d build a dividend portfolio today. I’d focus less on high-yield stocks and more on high-quality FTSE stocks that have attractive long-term growth prospects.
These kinds of stocks are more likely to maintain, and grow, their dividends over time. And that, ultimately, is the key to success when investing for dividends.
