To say 2020 has been a bad year for dividend investors seems like a bit of an understatement. According to the latest Dividend Dashboard from AJ Bell, the FTSE 100 is now expected to pay out its lowest dividends since 2014. Estimates for the total stood at £91bn at the beginning of the year, but the figure now looks closer to £62bn.
Almost half of the FTSE 100‘s companies have either reduced or totally suspended their dividends. That will be a blow to those depending on the income to fund their retirements. But the pain will hopefully not be too long-lasting, as the City is expecting a recovery in 2021.
And while dividends are reduced, I think that gives long-term investors a chance to lock in better long-term yields. That might sound perverse, but share prices have plunged along with those slashed dividends. And if they recover to previous levels, which I think most will over the next few years, we could be looking at bargain buys now.
Take a look at HSBC, for example. The PRA obliged HSBC to cut its dividend, despite little exposure to the UK economy. Prior to that, the bank’s dividend, at 51 cents (40p) per share, was yielding around 6%. I think that level of dividend will return, even if it takes a few years. If it does, with HSBC shares down 37% in 2020, we’d be looking at a yield of 11% on today’s price.
Tasty future yields
Even if we didn’t see 40p per share again for a long time, we’d still only need 22p per share to get back to a 6% yield. Is that likely? Yes, I think it is.
What other companies have cut their dividends, but stand a very good chance of a rebound? I think all the banks will reintroduce some level of dividend, even if they start off cautiously.
Aviva canned its final dividend for 2019 as a response to the Covid-19 crisis, in a move that attracted some criticism. But analysts are already forecasting a return close to 2018 levels by the end of the current year. On the depressed Aviva share price, that suggests a yield of more than 10%. And it would be covered 1.6 times by earnings.
Another approach is to stick with companies that have not reduced their dividends, but that’s not without danger. BP, for example, has shown no sign of a cut yet, and is on a forecast yield of 9% now. But there has to be a realistic chance it will follow Shell‘s lead before the year is out. And it must partly be fears for a drop in the cash that’s keeping the share price low and the yield so high.
Long-term dividends
So what should we do? Right now, most commentators are concentrating on expectations for the current year, and on forecasts for next year. And the City is pretty bullish over a strong dividend recovery in 2021. But I think that’s the wrong way to look at it.
I’m less concerned by this year’s dividend or by next’s. I’m more interested in the stream of dividends that these companies are likely to provide over the next five years, 10 years, and beyond. And on that score, I think now is a great time to lock in some great long-term yields.
