When the pandemic hit the stock market in 2020, there was one early casualty. Dividends. Those investing in dividend shares for long-term income took a hit. The financial sector suffered especially badly, with banks suspending their payouts.
We’re now facing a new economic crisis. Does that mean it’s time to shun dividend shares fearing another income cut? I think quite the opposite, that we’re in for a great time to buy dividend shares. I’ll tell you why.
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Firstly, we really only had one bad year for dividends, in 2020. Many were cut. But most were quickly reinstated, and we’ve even had some extras to make up for missed payments.
Dividend share comeback
For 2022, total dividends paid by FTSE 100 companies are expected to come close to 2018. And that was the best-ever year for total cash returns from the UK’s top index, including share buybacks.
Due to our cloudy economic outlook, we could indeed experience dividend cuts again. But there are two ways I think investors can deal with that and prosper.
One is to go for stocks that have maintained, or ideally raised, their dividends for long periods. The Associated of Investment Companies has compiled a list of what it calls Dividend Heroes. These are investment companies that have raised their dividends for at least 20 years in a row.
Some of them have managed the feat for more than 50 years, which puts our short-term fears into perspective. Past performance is not an indicator of future performance. But an investment trust with that kind of record is surely not going to let it go lightly.
More than a decade
On top of that, many individual companies have maintained their dividends for at least a decade. Legal & General is one, and that’s on a forecast yield of 7.5% this year.
And that long-term dividend favourite, National Grid, has raised its dividend every year for the past decade and more. Yields are around 4.5%.
That’s one way to minimise the risk of losing out with dividend shares. But a short-term cut can even help make us extra money.
Buying in the dips
Look at Barclays. In the pandemic, banking sector dividends were suspended at the direction of the Prudential Regulation Authority. But they’re back now, and Barclays paid a dividend of 6p per share for 2021. On the current Barclays share price of 169p, that would provide a 3.6% yield if repeated this year.
But the shares fell to less than half the current level in the early pandemic days. So anyone who bought around those low prices could be looking at a yield of better than 7%, based on their purchase price.
Time matters, not timing
Few of use will be lucky enough to get the timing quite that good. But any short-term dividend dips caused by economic pressures are likely to depress share prices. And that gives us a chance to lock in bigger effective yields for the long term.
Stock market weakness ahead? I say that means investors should look forward to buying cheap dividend shares for better long-term income.
