Most of the worries on the part of FTSE 100 stock investors recently have come from falling share prices. If you bought a stock at a particular price at the start of the year, on average you would be down 25%. Yet concern is now starting to come from income investors, due to the amount of FTSE 100 dividend cuts.
Income investing has the primary aim of generating money from dividend payouts. As a general rule, the percentage yield you get from these dividends is usually higher than the interest rate you could get on a Cash ISA or elsewhere. This makes sense, given that you also take on a higher risk by investing in a stock (as the share price fluctuates on a daily basis).
More FTSE 100 dividend cuts
Several big names have over the past few weeks announced a full or partial dividend cut. Oil giant Royal Dutch Shell cut the planned dividend to investors by two-thirds. This is the first cut since World War II, and is noteworthy given the size of recent payouts from the firm.
Added to this was BT. The telecommunications firm announced a suspension of the dividend for two years. It’s hoped that the saving from this will help a cost-savings drive of around £3.3bn.
Not all bad news
In my opinion, there are two ways of playing the dividend cuts. One way is to buy the firms that have cut dividends, aiming for share price appreciation. The other way is to buy shares in firms that still pay a dividend, for income investing.
The first idea comes from the thinking that cutting the dividend is good for the long-term health of the business. If BT manages to pull off the £3.3bn cost-savings initiative, then chances are the slimmer, more efficient company will be in a position to pay out dividends in two years’ time. The cost-savings drive will enable the firm to cut legacy parts of the business that aren’t that profitable. It will also help to focus on what really is the priority (consumer, small business, large business).
So buying in to the firms now could present a good longer-term buy. There will be no dividends in the interim, but any decent share price move higher should easily cover this.
Buy safe alternatives
If you’re purely looking for income, then there are still some options out there to pick up FTSE 100 dividend-paying firms. I recently wrote about four good ideas, which you can read in full here.
One example I wrote of was Legal & General. The insurer has committed to paying out the dividend for this year, totalling around £753m. Whether new investors can buy in for future dividends remains to be seen. But if it did commit to paying more dividends further into the future, then the dividend yield of around 8% makes it a good buy.
Overall, you can’t hide from big names pulling dividends. But by thinking a little outside the box, you can still find good investing opportunities.
Jonathan Smith owns shares in BT Group. 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.