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Investing for income? Is the FTSE 100 bonfire of dividends set to continue?

Investing for income from FTSE 100 stocks has become distinctly challenging in 2020. There was another round of dire dividend news last week and the number of blue-chip stocks that have now cancelled, cut or suspended their payouts has risen to 40.

In this article, I’ll review the current state of play. And I’ll discuss whether the bonfire of dividends is set to continue, and look at some popular income stocks that are still currently paying out.

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Cyclical stocks and investing for income

Businesses that are highly geared to the economic cycle are more vulnerable to cutting their dividends in an economic slump. Of the 40 FTSE 100 companies that have disappointed on dividends this year, the vast majority are cyclical stocks.

The Footsie’s housebuilders have cancelled their payouts, as have the big commercial property firms. Dividends have disappeared across the travel, leisure, hospitality and non-food retail sectors, as well as many industrials. The major banks have had their arms twisted by the regulator to cancel their payouts. And there’s been similar pressure on insurers.

Legal & General (running yield of 9%) is one insurer that’s resisted the pressure. However, if we head into a deep and prolonged recession, which is certainly possible, the bonfire of dividends could continue. L&G’s payout and those of the other remaining cyclicals currently sweetening the kitty would be high on the risk list.

Shell shock

Last week, the Footsie’s biggest payer, Shell, announced it’s slashing its quarterly dividend by 66%. This is its first dividend cut since World War II. And it’s not a temporary move, due to the coronavirus crisis and oil-price crash. It’s a complete reset of the base level of the payout.

My colleague Roland Head has argued it’s the right decision. I agree with him. It will help Shell invest in its transition to a more sustainable energy business. Ahead of the cut, Shell’s running yield was 10.4%. Currently, the forward prospect is 4.3%. I think this is still attractive, if you’re investing for income today.

Two days before Shell’s cut, BP announced a maintained quarterly dividend. The running yield is 11%. However, with BP facing the same energy transition future as Shell, I wouldn’t be surprised if its new chief executive goes for a rebase of the dividend later this year. Nevertheless, I’d say the stock has income appeal at today’s price, even on a reduced payout.

Defensive stocks and investing for income

Most defensive stocks — businesses whose earnings tend to be more resilient through the economic cycle — are still currently paying dividends. These include utilities, like National Grid (5.1% running yield), pharma firms, like GlaxoSmithKline (5%), and consumer goods companies, like Unilever (3.5%). Supermarkets Tesco (3.9%) and Morrisons (3.7%) are also in income investors’ good books.

However, Sainsbury’s is a defensive disappointer after deferring a decision on its dividend until later in the year. Similarly, troubled British Gas owner Centrica has let the utilities sector down (not for the first time).

Bottom line

Investing for income from FTSE 100 stocks is certainly challenging right now. However, I believe there are many defensive businesses capable of sustaining their dividends. I’d expect a portfolio of these stocks to deliver an income stream comfortably above interest on cash or bonds.

Meanwhile, there also remain some higher-risk, high-yield cyclical stocks for the most adventurous income seekers.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended Tesco. 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.