I like to divide my investment portfolio between FTSE 100 growth and income stocks. My growth stocks have shown healthy growth over the past year, thanks to the stock market rally. But my income stocks have disappointed. This is partly because companies cut back on dividends during the pandemic. And partly because the dividend amounts are less than they were pre-pandemic.
But I am optimistic that this can change now for at least oil and banking stocks. Both sectors are closely linked to the economy. And the economy is showing clear signs of picking up. The UK economy showed monthly growth of 2.3% in April as the second stage of lockdown easing kicked in. This is the sharpest growth in eight months.
Oil biggies can make gains
Increasing demand in the economy has been evident in rising oil prices as well. We have seen this since the start of 2021. But it became glaringly obvious this past week as oil prices reached a two-year high.
FTSE 100 oil companies BP and Royal Dutch Shell will continue to be gainers from this trend. Both of them saw improved recent results because of higher prices. Additionally, as the pandemic recedes further and travel can ease more, oil demand will increase further. Whichever way I look at it, oil companies stand to gain.
I think this could prompt them to increase their dividends too, which were cut back last year. I hold both stocks because of the generous dividends I earned in the past and their long-term dividend history. And now, I am hopeful that they will increase again, unless the pandemic either forces travel restrictions again or extends existing restrictions for a longer time.
Banks can increase dividends
Next, I am hopeful that at some point this year, banks will be in a position to increase their dividends. So far, their dividends have been subject to stringent regulation. Last year, as the stock market crash happened, the Bank of England’s (BoE) Prudential Regulation Authority (PRA) asked them to withhold dividends.
By the end of the year, as the vaccines were developed and the overall environment started to look better, they were allowed to resume dividend payments. However, these have been subject to significant constraints based on their loans profile. As a result, so far their dividend yields are quite low. Not even one FTSE 100 bank has a yield higher than 2%.
But this too, can change. The PRA has said the present constraints are temporary. With sure signs of a pick up in the economy, the BoE’s own bullish estimates for economic growth in 2021, and improved results across the sector, I think banks will be free to pay higher dividends sooner rather than later.
I particularly like Lloyds Bank from a passive income perspective. It had the highest dividend yield pre-pandemic across banks. Moreover, as a UK-centric bank, I think it is best placed to gain from the economic recovery. On the flip-side, it could suffer if the recovery falters or if loan repayments become weak. But I think that risk is small. I would consider it from a long-term perspective.
