The outlook for UK dividend shares in 2022 looks bright to me. And I can’t help thinking we could see further dividend progress in the coming years.
Even after the setbacks of the pandemic and its aftermath, 2022 still looks like a good year for FTSE 100 companies. Earnings are expected to hit record highs, and that has got to be good news for dividends.
Buybacks vs dividends
Around 30 companies in the top index have announced share buybacks this year. So there is spare cash available to hand back to shareholders. The buyback cash is not being returned directly as dividends. But it does mean that future dividend payments should be spread across fewer shares, and that bodes well for future yields.
I think it makes sense for companies to use buybacks when their share prices are low. They’re generating surplus cash in a tough economic year like 2022. And that boosts my optimism that the same companies will be able to pay better dividends next year and beyond.
Forecasts suggest the FTSE 100 should provide an overall dividend yield of about 3.9% in 2022. That’s still down on its long-term peak, after a couple of poorer years. After all, many firms slashed their dividends in 2020 due to the pandemic.
Reliable dividend shares
They did start coming back in 2021, but there’s still a way to go yet. The all-time record in terms of total cash came in 2018, and this year is unlikely to meet it. But I see a very good chance of 2023 beating that record.
Analysts are forecasting some attractive yields from individual dividend shares in 2022. But the real question is whether they’re sustainable. One of the biggest expected yields, for example, is from Persimmon. But housebuilders are supposed to be feeling the pinch this year, aren’t they?
Persimmon’s completions and revenue were both down a little in the first half. But house prices are still rising enough to offset build cost inflation. As a result, Persimmon’s gross margin is growing, and forward sales are up. Its forecast total yield for 2022 stands at around 12%, including special dividends.
Cyclical industries and stalwarts
Some of 2022’s big dividends are from cyclical businesses, which suggests caution. Shell is on a predicted yield of 4.2%, with BP on 4.8%. Those are both boosted by current high oil prices. But billionaire investor Warren Buffett has been buying more oil stock lately, and that gives me some confidence in the sector.
Rio Tinto is on a big forecast dividend yield of close to 14%, though that is a very cyclical industry. It is expected to fall, but forecasters are still indicating around 8% as far out as 2024.
Meanwhile, some stalwart dividend stocks are on very attractive yields. The British American Tobacco’s has been growing steadily, and City pundits are suggesting a yield approaching 7% this year. And it’s forecast to get even better.
Overall, despite the gloomy headlines I read every day, I’m convinced 2022 could be a very good year for dividends shares. And I reckon 2023 could be even better.
