Over the past few years, one negative factor for the FTSE 100 has been declining total dividend payments. In 2019, for example, total FTSE 100 dividend payments declined by an estimated 11%, according to AJ Bell,
With the pandemic and associated global economic weakness in 2020, analysts estimate that total FTSE 100 dividends could fall another 24% in 2020.
Given that many investors buy the Footsie for its dividends, shares of the index have fallen substantially.
In terms of performance, the FTSE 100 is down about 16%, year-to-date.
The Footsie hasn’t done really well in terms of total dividend payments or stock performance over the past few years. But I think there is a pretty decent probability the declining dividend trend could reverse next year. As a result, I am considering buying the FTSE 100. Here’s why.
More FTSE 100 total dividends next year?
First, many economists expect more global growth next year as the world begins recovering from the coronavirus and as various fiscal and monetary stimulus efforts continue.
The recent vaccine candidate efficacy data from Pfizer and Moderna has been pretty optimistic. Although the vaccines haven’t been approved yet, most analysts expect the world to have pretty effective vaccines approved by next year. If governments around the world do a good job in terms of Covid-19 vaccine manufacturing and distribution, I think the world economy could begin to normalise.
As a result of a more normalised economic environment, many analysts expect global growth and FTSE 100 earnings to increase. Many FTSE 100 companies are leading global multinationals and would potentially benefit if global growth increases.
In terms of specific estimates, the IMF expects the world economy to grow around 5.2% next year. In terms of FTSE 100 earnings estimates, analysts expect adjusted net profit to rise by around 47% in 2021 to around £120bn according to an AJ Bell report.
If earnings increase meaningfully, I think many Footsie components could increase their dividend payments.
Second, many analysts expect some FTSE 100 consitituents such as HSBC and Standard Chartered to restart their dividends next year as regulators become less concerned about Covid-19’s economic impact.
Although the banks’ initial dividends might not be as high as their pre-Covid-19 levels, I think it would still help the overall Footsie’s yield.
A potentially powerful tailwind
If the FTSE 100 dividend payout rises meaningfully, I think the index could potentially rise too. This assumes that any increase in total dividend payments will increase the yield.
Due to various central banks easing monetary policy to fight Covid-19, yields around the world are pretty low right now. The 10-year UK Gilt currently has a yield of around 0.32%. Meanwhile, the US 10-year Treasury bond currently yields around 0.86%.
If the Footsie has a higher yield, I think there will be more demand, all else being equal. If there is more demand, I think there is potential for higher index prices.
Given the FTSE 100’s quality, its exposure to the long-term advancement of technology, and the dividends, I’d consider buying the index for the long term.
Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Standard Chartered. 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.