There are various different types of investing, but returns from these strategies fall into two categories. First, there’s capital gains: profits made from selling assets at prices higher than purchase prices. Second, there’s income: regular cash payments made to asset owners. My value-investing strategy — buying cheap shares in quality companies — aims to capture both sets of returns. Over time, as well-run companies grow, their shares usually enjoy an uplift. Also, rising profits often equate to higher cash payouts — and I do love my dividends.
Many cheap shares pay huge dividends
According to A J Bell‘s Dividend Dashboard (PDF), the total dividends paid by FTSE 100 companies should increase by £10.9bn to £70.8bn for 2021. Alas, dividends have slumped since 2019, with Covid-19 restrictions hurting company earnings. Even after a strong rebound in 2021, it could be years before they return to their 2019 peak. Furthermore, FTSE 100 dividends are concentrated in just a handful of big companies with cheap shares.
Just 10 FTSE 100 giants paid the majority of FTSE 100 dividends in 2020. Also, 15 Footsie heavyweights each paid a dividend of over £1bn in 2020. Among these 15 businesses are some genuinely cheap shares that I’d happily own today. Here’s the list of all £1bn+ dividends paid by FTSE 100 members, taken from the latest Dividend Dashboard.
| Company | 2020 Dividend | Cut since 2010? |
| British American Tobacco | £4.95bn | No |
| BP | £4.42bn | 2010, 2020 |
| Royal Dutch Shell | £4.18bn | 2020 |
| Rio Tinto | £4.03bn | 2016 |
| GlaxoSmithKline | £4.01bn | No |
| Unilever | £3.86bn | No |
| AstraZeneca | £2.76bn | No |
| Vodafone | £2.16bn | 2018 |
| BHP Group | £1.89bn | 2016 |
| National Grid | £1.74bn | No |
| Diageo | £1.60bn | No |
| HSBC | £1.32bn | 2019, 2020 |
| Imperial Brands | £1.30bn | 2020 |
| Reckitt Benckiser | £1.24bn | No |
| Legal & General | £1.05bn | No |
The FTSE 100’s #1 dividend darling in 2020 was tobacco firm British American Tobacco, which paid out almost £5bn. Despite slashing their dividends last year, BP and Royal Dutch Shell still managed to hand over cash of £4.4bn and £4.2bn respectively. The remaining cheap shares paying the biggest dividends were global miner Rio Tinto (over £4bn), pharma giant GlaxoSmithKline (£4bn) and consumer-goods behemoth Unilever (£3.9bn).
These 15 firms paid out £40.5bn in 2020
Forecast 2020 dividend payments from these 15 Footsie firms total a whopping £40.5bn (although these aren’t guaranteed, of course). These 15 companies pay out roughly £4 in every £7 of FTSE 100 dividends. I see them as key candidates for my income portfolio. Indeed, looking at this list, I like what I see: big, well-known businesses with large cash flows to fund shareholder rewards. If you forced me to construct a portfolio of cheap shares consisting solely of these 15 dividend darlings, I wouldn’t complain. There’s a decent spread of industries, despite some doubling-up (BP and Shell, BAT and Imperial, GSK and AstraZeneca, BHP and Rio Tinto, Unilever and RB).
It’s worth noting that several of the dividends have been cut in recent years. Two firms (BP and HSBC) lowered payouts twice in the past decade, while Shell and Imperial both reduced their cash returns last year. With these dividends rebased, there may be scope for future increases from here. Likewise, HSBC paid a giant dividend before suspending it due to Covid-19. However, this is expected to return in the first half of 2021.
In summary, I’d be a happy owner of pretty much all of these 15 cheap shares. They face risks and challenges. But the idea of sharing in over £40bn in cash paid out each year? I rather like the sound of that!
