I love a good UK share with big dividend yields. Who doesn’t? But with the Covid-19 pandemic rolling on, taking large yields at face value is dangerous business.
Dividends from UK shares collapsed by almost half in 2020 as the pandemic hit corporate profits and balance sheets. And shareholder payouts are likely to keep falling in the near term at least as the enduring public health emergency keeps the world locked down.
I won’t stop searching for big-yielding British companies for my Stocks and Shares ISA, however. There are plenty of quality UK shares that should keep paying big dividends regardless of the Covid-19 crisis. Here I explain whether I think the following FTSE 100 stocks are brilliant buys for my portfolio or investment traps.
A high-risk UK share
There are plenty of oil market analysts out there who are predicting a steady rise in crude prices following 2020’s crash. They’re expecting demand to improve as the pandemic unwinds and the global economy gets back to normal.
Heck, the boffins at UBS have even been raising their forecasts in recent days despite “more severe” lockdowns than they had anticipated being imposed at the start of 2021. They now reckon the Brent benchmark will average $57 per barrel this year, up from $56 at present. The number crunchers upgraded their forecasts in 2022 and 2023, too, and reckon black gold will average $60 in both periods.
Does all of this make BP (LSE: BO) a solid buy today, then? I’m not so sure. Even this UK share’s 5.6% forward dividend yield isn’t enough to attract me to buy. Any signs that Covid-19 lockdowns will persist long into 2021 could send Brent prices hurtling through the floor again, resulting in more dividend carnage at the FTSE 100 oilie.
Serious demand questions aren’t the only reason I’m concerned about BP’s dividends, however. Resilient oil supply means that crude inventories continue to build. Meanwhile, pressure from Russia for the OPEC+ group of countries to raise production keeps on growing, threatening to release extra waves of unwanted material onto the market.
I can’t deny that those dividends do look attractive, that BP has a strong track record of paying them and is working to reduce its reliance on oil. But it’s not for me at present.
8%+ dividend yields!
This uncertainty means I’d be happier to use any cash I’d spend on BP to buy shares in Persimmon (LSE: PSN) instead. And it’s not just because the yield at this UK share sits at an even higher 8.7% for 2021.
Don’t get me wrong. This FTSE 100 stock carries risks of its own. Firstly, the twin crises of Covid-19 and Brexit spell danger for new homes demand this year. Secondly, a growing shortage of construction materials threatens to hamper production rates at Persimmon and its peers in the near term and beyond.
That said, I think this UK share can still look ahead with optimism. I think favourable lending conditions mean that demand from first-time buyers should keep outstripping supply. Rocketing house prices during pandemic-hit 2020 support this view, I feel. There’s a strong possibility that this homes shortage will persist long into the future too. So I expect Persimmon to remain a generous dividend payer well beyond 2021. I’d buy for my portfolio.
Royston Wild 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.