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FTSE 100 companies are cancelling dividends. Here’s how I’m investing now

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The FTSE 100 increased by over 9% yesterday. This was encouraging for investors, who’ve been hit by the ongoing stock market crash. At time of writing, index levels look elevated in today’s trading as well. But not everything’s quite all right. In response to business disruptions caused by the spread of the coronavirus, companies are cancelling dividends

Getting risk averse

This is disappointing, of course, if I’m an income investor. But I do think that the investor can still make good investing decisions today and end up ahead.

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To start with, I’m identifying FTSE 100 companies that are most likely to cancel dividend payouts. I’d stay away from them for now. These are likely to be companies that are hit hardest by Covid-19. For instance, companies in sectors like travel, transportation, and hospitality are the most obvious hits because of the lockdowns, as well as retail other than grocers. 

Next are cyclical stocks. As the overall economy weakens because of the lockdown, cyclical stocks will become increasingly vulnerable. Banks, real estate, and automotive stocks would be instances of this. In fact, in this very particular situation, they are also hit by the disruptions to business hours, winding down of construction activity, and temporary factory closures, respectively.

Seeking dividend dependability

But there are still FTSE 100 stocks that look appealing despite the environment of gloom and doom. The first set are ones that are likely to show dividend continuity. I’m most inclined towards those that have a long history of paying dividends. It would be a bigger departure from the beaten path for them than for companies that have pulled back during recessions in the past. This would likely make a dividend change a harder decision for management. 

Focus on FTSE 100 growth stocks

I think it may be a good idea to look at investing strategies other than dividend investing alone. Growth investing can be rewarding too in the long-run.

Plenty of FTSE 100 stocks are trading at relatively low levels. One example is the FTSE 100 pharmaceutical giant AstraZeneca (LSE: AZN). It has a rising share price trend over time, which is encouraging for a long-term investor. Its prices have cooled in the recent weeks to levels seen early last year, making it a good opportunity to buy. It does still have a high price to earnings (P/E) ratio of 65.6 times, but going by past trends, it might not decline anytime soon. Its share price has already started inching up. In other words, the high P/E is just the value that investors put on AZN, the way I see it. 

As a defensive stock, I also like that it’s not as affected by economic conditions as some others. According to a Financial Times report, it has flagged that the coronavirus crisis could impact its growth, but its financials are still expected to look quite healthy. FTSE 100 consumer defensives like Unilever and Diageo are also attractive right now. Even though they offer muted dividends, they can make up for it with capital gains overtime.  

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended AstraZeneca and Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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