Current market conditions make the present day feel like the wrong time to be an income investor. Companies are slashing dividend payments left, right, and centre in order to protect balance sheets against total ruin.
This week, The Financial Times reported that UK-listed companies cut or cancelled more than £3.5bn worth of dividend payments. That represents the biggest drop since the financial crisis in 2008, with the potential for more to come.
This points towards the onset of an uninviting ‘dividend drought’. Payments made to investors for holding shares in companies are beginning to dry up.
Income investors (and any investor for that matter) would do well to consider stocks that are able to offset such a dry-up in dividends. Here are two FTSE 100 companies that I believe are in a good position to do just that.
Sainsbury (LSE: SBYR) is the second-largest chain of supermarkets in the UK, just behind Tesco. The company has a 16% share of the supermarket sector, classifying it as a heavyweight in the industry.
Sainsbury’s share price has shed around 10% of its value since the beginning of 2020. Despite this, it has staged a superb recovery. In light of current market conditions, an 18% rise since 12 March is impressive.
Sainsbury’s supermarkets will remain open for business throughout the coronavirus pandemic. What’s more, supermarkets have experienced an explosion in demand for various goods over recent weeks.
A dividend yield of 5.28%, combined with a price-to-earnings ratio of 9.35, looks appealing to me and suggests there is value to be had.
Inevitably, Sainsbury’s will continue to face challenges in the future. The company operates in an intensely competitive sector with rivals such as Aldi and Lidl offering a cheaper option, while Waitrose and Ocado offer an upmarket alternative.
That said, with growth opportunities in clothing and financial services as well as strong and consistent cash flows, I believe shares in Sainsbury offer protection against the wider turmoil within the stock market. Arguably, this is something that other companies simply don’t possess right now.
Polymetal International (LSE: POLY) is a precious metals mining company headquartered in Cyprus. The Group has a portfolio of nine mines that produce gold and silver.
As investors flee to safe-haven assets in times of economic uncertainty, companies such as Polymetal are well-positioned. I think the company possesses the business strategy and financial outlook to fight back against the effects of the coronavirus on markets.
On top of this, the company recently posted full-year results for 2019. The report outlined record earnings and solid free cash flow. Revenue increased by 19% and gold sales were up 14% year on year.
Sales in gold and silver are directly linked to the market prices for these metals. With that in mind, I think Polymetal is set to profit from the recent spike in the price of gold. Expect output and sales to increase in light of current market conditions.
The company’s share price made monumental gains over the last few weeks to finish up 8% higher than at the start of the year. This comes in light of a market crash that caused the FTSE 100 index to shed around 30% of its value.
All things considered, with the dividend yield currently sitting at 4%, I think Polymetal is a strong buy for investors seeking to offset the evaporation of dividends caused by the crash.
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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.