In 2019, the FTSE 100 delivered approximately 4.7% in dividend returns. In 2020, it looks set to be slashed to around 3.2%, though I think that’s still a decent yield. Forecasts are already looking better for 2021, with a yield of around 4.2% on the cards. Today, I’m looking at three stocks I’d buy for dividends in 2021.
Banking dividend cut
Lloyds Banking Group (LSE: LLOY) severely cut its dividend in the early days of the Covid-19 crisis. That was at the behest of the Prudential Regulation Authority, but probably wise anyway. Possibly a handy opportunity for Lloyds too, as I think its rapid dividend progress since emerging from the banking crash was perhaps a bit hasty.
With the final dividend for 2019 suspended, that year produced a 1.8% yield — down from more than 6% in 2018. And it’s only the dividends that had been keeping me cheerful about my Lloyds shareholding. The current pandemic year looks set to deliver a dividend of only a little over 1% from Lloyds.
Analysts are forecast an earnings rebound in 2021, though not quite back to 2019 levels. But a dividend restored to about half of 2018’s pre-cut payment would yield 4.5% on the current share price. That’s only possible because Lloyds shares are down 40% in 2020. But I think it represents a great buying opportunity, and it’s a top-up candidate for me.
A 2021 recovery pick
I turn now to Centrica (LSE: CNA), whose earnings have been sliding for years. Centrica pared its 2019 dividend to the bone, though I reckon that was seriously overdue. It was another company in trouble, with dividends sliding into uncovered territory. But it stubbornly kept paying, for at least two years too long in my view.
The 2020 dividend is set to yield only 1.3% this year. And that’s after Centrica shares have shed almost 80% of their value in five years. The price is down 47% so far in 2020. Still, Centrica bottomed in April and has since climbed 60%.
There should be a further earnings slip this year. But analysts finally have an upturn on the cards for 2021. If they have it right, we’ll see a modest uptick in earnings and the reinstatement of a decent dividend. It’ll be a lot less than the old days, but on today’s share price it would yield 4.6%. I rate Centrica a recovery opportunity to keep an eye on.
My third choice is another bank, HSBC Holdings (LSE: HSBA). HSBC is a worldwide giant, with a reach stretching around the world. In recent years it’s been looking a bit cumbersome and a bit over-extended, when many banks are striving to be more lean and streamlined.
To rectify that, HSBC has been reducing headcounts and is refocusing on its most profitable home markets in the Far East. Is it a British or European bank? Or is it a Hong Kong bank? Well, the clue’s in the name, and a swing back towards its roots should improve the long-term outlook.
The dividend was cut along with the rest, and it’s set to yield around 1.5% this year. But a forecast hike in 2021 would take it to 5.8%. I do wonder if cover of only around 1.5x might be a bit tight during a restructuring phase. But I see a solid long-term future for HSBC dividends, and it joins my candidates for 2021.
Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. 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.