2020 will go down as a disastrous year for income investing. Some of the most dependable FTSE 100 income generating stocks have reduced dividends. Many others have stopped paying them altogether. Yet others are still in the process of suspending dividends. While this is indeed a challenge for investors, I think it can be overcome if we adjust our income investing style to this ‘new normal’.
The big underlying reason for dividend cuts is either actual or anticipated weakening in performance. Hospitality and travel companies, for instance, have been hit the hardest. These include FTSE 100 stocks like IHG, Whitbread, Carnival, easyJet, and IAG. But other cyclical stocks have faced their fair share of heat as well. Stocks of retailers, property developers, and luxury brands among others are included in this set.
FTSE 100 dividend payers
But there are still others that continue to pay dividends. Big tobacco companies like British American Tobacco and Imperial Brands are two examples. So are consumer goods stocks like Unilever and Diageo. However, I have to admit some dissatisfaction in investing in either of these two types of income generators. The tobacco companies have impressive dividend yields compared to other FTSE 100 stocks. For BATS, it’s 8.3% and for IMB it’s 6.6%.
There are, however, two risks to investing in these stocks. One, they may still slash dividends. IMB has already done so earlier this year. BATS may feel compelled to do the same, if market conditions stay weak. Two, both companies’ share prices have been weak for a long time. With the recession now officially underway, there’s even less likelihood of improvement in tobacco shares’ prices. In other words, I have to make peace with erosion of my capital to generate a steady income. Is the trade-off worth it? Maybe not.
For consumer goods companies like ULVR and DGE, capital erosion is not a worry. Both have proven to be robust stocks over time. But they offer muted dividend yields of 3.3% and 2.7% respectively. The upside is that they are relatively dependable. Even with a small decline in revenue, ULVR reported a healthy increase in earnings per share in its latest update. This is a huge sign of dividend dependability for me. DGE’s latest results have been less robust, but it is still a profitable company, and alcohol demand can be resilient even in slowdowns. My question now is – do I necessarily have to settle for a low yield to get capital protected and dependable returns?
What should I buy?
I don’t think so. Consider a FTSE 100 stock like GlaxoSmithKline, which has bounced back from the stock market crash to a large extent. It’s a profitable defensive stock, which is working on Covid-19 medication. And it has a dividend yield of 4.9%. It’s also still affordable with an earnings ratio of 12 times. Another example is United Utilities with a 4.7% yield. In sum, there are still good options available for dividend investors, although they are just a tad harder to find.
