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FTSE 100 dividends have crashed in 2020. That’s why I’d buy dividend stocks now

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A good few FTSE 100 companies have reduced or suspended their dividends in 2020. The banks are perhaps the best examples, under instruction from the PRA. I do think they’ll all come back in due course, but I hadn’t realised the scale of the devastation.

According to Link Group, dividends in the UK almost halved in the third quarter. With a 49.1% fall to a total of £18bn, we saw the lowest Q3 dividend payment in the UK in the past decade. Almost two thirds of the companies listed on the London Stock Exchange are paying less for the quarter than a year previously. Still, the trend is softening a bit, after dividends fell by 57.2% in the second quarter.

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But what about FTSE 100 dividends specifically? The latest Q3 Dividend Dashboard from AJ Bell suggests that FTSE 100 dividends won’t suffer so badly this year. We should expect that, really, as it’s largely the reason dividend investors generally prefer the top index. The companies in it are larger and more mature, typically have longer track records of progressive payouts, and should be more resistant to short-term pressures.

FTSE 100 more reliable?

But even with the FTSE 100’s traditional superior safety and resilience, forecasts suggest total dividends will still fall by 24% in 2020. As it happens, that’s almost spot on the current year-to-date fall in the FTSE 100 itself. Coincidence? Probably not. It suggests to me that the pain is spread across all kinds of shares, both growth and dividend prospects.

The expected drop in dividends represents a hefty £18bn less going into investors’ pockets this year. That could take a significant chunk out of income for those depending on it, and sizeably reduce the cash for others to reinvest. So what will I do about it?

Well, for one thing, I can’t help wondering if some sort of FTSE 100 dividend reduction was perhaps inevitable anyway. In terms of cover by earnings, a lot of top dividends really have started to look a bit stretched in recent years. At the end of 2019, many popular dividends were only thinly covered. FTSE 100 dividend cover for the past couple of years has been hovering around 1.6 times to 1.7 times, and falling. That might look fine for an individual company. But the weakest in the index were significantly below that. And a scary number of them provided cover of significantly less than 1.5 times.

Dividend crunch

I think some sort of dividend crunch was probably coming. But company boards are usually loath to cut their dividends, or even slow their rate of growth. It upsets the big investment companies focused on their next quarterly performance figures, and that just won’t do.

Now that we’ve had the 2020 cuts, we’re actually looking at forecast cover for the FTSE 100 of only around 1.4 to 1.5 times. That’s based on this years much-reduced earnings forecasts, mind, so I’m not too worried. When earnings pick up again, companies can restart dividends from today’s reduced levels. And that should hopefully mean more reliable long-term income. My strategy is to invest for tomorrow’s dividends today, while they’re cheap.

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Alan Oscroft 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.

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