After the banking crash, I reckon some in the financials sector made a mistake. They pursued an aggressive strategy of rebuilding their dividends as fast as they could. I was seeing hints of over-stretching before Covid-19 arrived. But the pandemic has brought slashed dividends across the sector. And after big share price falls, are banks and insurance firms among the best shares to buy now?
The stock market crash has given the sector a great chance to get dividend strategies straight. Overstretched? Now’s the time to rebase. Forced to cut dividends in 2020? Here’s a breathing space to plan for the future. No problems with dividends? Could be a great time for companies to restate their outlook.
One of the best shares to buy now?
Aviva (LSE: AV) was hit badly by the crash, and its share price is down 27% year-to-date. Aviva cut its dividend under regulatory pressure early in the year, suspending the final 2019 dividend to leave shareholders with a yield of less than 2.5%. Oh, and guess which of the two companies I’m covering today I own? Yes, that’s right. Never mind my thoughts about the best shares to buy now, Aviva is on my list of crashing shares I already own.
But later, the board approved an additional interim dividend of 6p per share. And analysts are predicting a total dividend yield for 2020 of 10%. That’s from shares on a very low forward price-to-earnings multiple of under six. Why does the market value Aviva so lowly? Investors have been fearing the costs of structural changes at the company for some time. And that posed questions about the firm’s medium-term dividend potential.
But Aviva’s upbeat statements, coupled with its confidence in its dividend prospects, boosts my optimism. It would have been easy for the firm to rebase its dividend this year without too much adverse consequence. What about the best shares to buy now? That’s a personal decision, but Aviva is on my list for a possible top-up.
Five-year dividend plan
Legal & General (LSE: LGEN) has just revealed its new dividend plan. The insurer has managed to keep a decent dividend going, and traditionally has offered one of the sector’s better yields. Crucially, in recent years the dividends have been well covered by earnings — cover in 2019 came in at a little over 1.7 times.
In a trading update Thursday, the company said it still expects operating profit for the full year to be broadly in line with 2019. And that alone pushes LGEN at least halfway towards my personal list of best shares to buy.
I was most impressed by the company’s new five-year ambitions. Legal & General is going to keep the 2020 dividend flat. But from next year, it intends to grow it in “low to mid-single digits“.
That should beat inflation, and I like that. It means my annual dividend income should grow in real terms in the years ahead.
Are these two really among the best shares to buy now? Investors have to decide that for themselves. But I think most FTSE 100 stocks will be ahead this time next year.
Alan Oscroft owns shares of Aviva. 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.