For FTSE 100 investors, 2020 has been a horrible year. Not only has the main market index fallen steeply, but many of its members have suspended, cut, or cancelled their dividends.
The FTSE 100 takes a beating
Since the start of 2020, the FTSE 100 index has dived by roughly 1,625 points to 5,980 today. That’s a decline of more than a fifth (21.4%) in seven months.
Things were far worse back in the spring, when the FTSE 100 crashed to its 2020 low below 5,000 on 23 March. The culprit, of course, was the rapidly spreading coronavirus, which led to lockdowns around the globe.
UK dividends crash
With some businesses completely deprived of revenues, and others facing extreme uncertainty, companies tried to conserve cash. Redundancies and cost-cutting followed, while many FTSE 100 members took an axe to their regular cash dividends.
Indeed, UK dividends collapsed by 57% in Q2 and will fall by at least two-fifths in 2020, according to the latest UK Dividend Monitor (PDF) from Link Asset Services.
According to Link, 176 UK-listed companies cancelled dividend payouts and 30 more cut them. Together, these represent three-quarters of usual second-quarter dividend payers. Just 61 increased their payouts.
As a result, dividends fell 57.2% to £16.1bn on a headline basis (or 50.2% to £16bn if special dividends are excluded). This was the lowest Q2 total since 2010 and the biggest yearly decline ever recorded by Link.
Link adds that Q2 dividends were down £22bn on a headline basis and £16.4bn on an underlying basis (excluding special dividends). These are huge sums for income-seeking investors and pension funds to lose.
The biggest-ever blow to dividends
Within the FTSE 100, payouts fell 45% in Q2, versus 76% among mid-cap FTSE 250 members. These falls are even worse than those caused by the global financial crisis, when two-fifths of companies cut or cancelled their payouts.
Looking ahead to 2020 as a whole, Link’s best-case scenario sees dividends falling 39% on an underlying basis to £60.5bn (from £98.5bn in 2019). Including special dividends, Link’s best-case basis expects total dividends to collapse by 45% to £61.6bn (from £110.5bn).
Link notes that this will be “the biggest hit to [FTSE 100] dividends in generations” and that “it could take until 2026 for dividends to return to their 2019 level.” Yikes.
The FTSE 100’s mega-dividends
While some FTSE 100 companies were forced to axe their dividends, others did so out of prudence. Notably, banks and most insurers were ordered or urged by regulators to suspend or cancel dividends. Also, some – notably leading oil producers – have been accused of using Covid-19 as an excuse to reset unsustainably high dividends.
These were the FTSE 100’s five biggest dividend payers in Q2 (largest to smallest): Rio Tinto, BP, British American Tobacco, GlaxoSmithKline, and Royal Dutch Shell. These five mega-caps collectively paid £5.8bn in Q2 dividends. That’s more than a third (36%) of all dividends paid by UK-listed companies.
The next 10 biggest FTSE 100 dividend giants paid out a further £4.8bn in dividends. Thus, the top 15 payers in the FTSE 100 accounted for £10.6bn in dividends. That’s two-thirds (66%) of the total paid by the entire London market. Wow.
I’d buy this FTSE 100 dividend dynamo
I wouldn’t recommend building a portfolio consisting solely of these five FTSE 100 dividend dynamos. For the record, my pick of this crop would be pharma giant GlaxoSmithKline (LSE: GSK), for its 5.1% current dividend yield and future prospects. GSK has been a dividend darling of mine for almost 30 years and long may this continue!
