Let’s raise a cheer. British businesses are once more paying dividends, after last year’s drought. This week, Tesco affirmed its commitment to investors by holding its dividend at 9.15p a share, giving a 3.94 per cent yield at a time of record low interest rates.
Yet investors hoping for a return to the heady days of 2018 – when FTSE100 companies distributed a bounteous £85.2billion – should lower their expectations.
The effects of the pandemic, and the push to save the planet through a move to renewable energy, are among the factors bringing about what people are calling ‘a reset’ in dividend policy. The result could be permanently lower payouts.
Against this shifting background, people who need a decent income also need a new strategy, especially given the hostile view of dividends in some quarters. Rosie Bullard of JO Hambro says: ‘I doubt we will go back to the era of bumper payouts. Banks and energy companies used to be the most generous, but those are not the areas where you would want to be invested now. Banks are facing political and regulatory challenges; there may be hidden risks in their balance sheets. Oil and gas are undergoing structural change.’
Bullard adds: ‘I’m now asking people, do you actually need an income? Wouldn’t you be better off looking for capital growth, as you have a £12,300 annual capital gains tax allowance and the rate on this tax is 20 per cent.’
Despite the reset, doing nothing may be tempting. Janus Henderson is forecasting a 5 per cent rise in global dividends to $1.32trillion in a ‘best-case scenario’.
Meanwhile, AJ Bell estimates that FTSE100 companies will pay out £74.3billion – 20 per cent more than in 2020, when financial or regulatory pressure caused the cancellation of many dividends.
BP and Shell – which cut payouts partly to channel more capital towards renewables – will still distribute reasonable sums in 2021. The yield on the FTSE100 could be 3.8 per cent. The most you can earn on a cash Isa at present is 0.4 per cent. But, as AJ Bell emphasises, just 10 companies could be responsible for three-quarters of the total payout, and concentrating too heavily on these shares would be a gamble,
Moreover, some of these companies do not have strong ESG (environmental, social or governance) credentials. Mining group Rio Tinto may yield 10.1 per cent, but its reputation is damaged. British American Tobacco and Imperial Brands should yield 8.1 per cent and 9.8 per cent respectively, but Big Tobacco is not to all tastes.
Whatever the bias of your portfolio, it makes sense now to be more global. In the UK, the payment of dividends became a contentious issue at the height of the coronavirus crisis. Disapproval lingers, despite the legitimate requirements of retirees and pension funds.
Attitudes are different elsewhere – which, as Matthew Jennings, investment director at Fidelity’s Global Dividend Fund, points out, suggests that ‘you need to think more broadly’.
This fund holds a mix of UK, Europe, American and Asian stocks, providing fresh opportunities for a better income, plus capital growth. Jennings points to companies like $15.7billion TSMC (the Taiwan Semiconductor Manufacturing Company) which is benefiting from a global shortage of the chips used in everything from smart phones to vehicles.
TSMC is also a major holding at Baillie Gifford Income Growth fund, which focuses on businesses with a ‘durable competitive advantage’. Bullard’s global suggestions are Schroders Asian Income (another fund that owns TSMC) and JPMorgan US Equity.
At some stage, BP and Shell could achieve such a success in renewables that they ramp up rewards to shareholders. But, for the moment income-seekers who want to back climate change solutions are looking to investment trusts like Bluefield Solar, Foresight Solar and Greencoat Wind.
Ben Yearsley of Shore Financial Planning says that, as result of the enthusiasm for renewables, these trusts stand at a premium to the value of their underlying assets.
But he adds: ‘The recently launched Downing Renewables & Infrastructure trust is at a 1.5 per cent discount. My pick for people who want broader ESG exposure would be Troy Ethical Income fund.’
This fund holds Unilever which has a yield of 3.48 per cent and Reckitt (formerly Reckitt Benckiser) which has a yield of 2.64 per cent – showing that some multinationals do value investors. This loyalty has also been displayed by investment trusts which increased dividends by 4.2 per cent in 2020 by dipping into reserves. The Association of Investment Companies’ dividend heroes include Alliance Trust, City of London and F&C which have raised income every year for more than half a century.
Yet, given the challenges of the current climate, many investors will be looking for trust with an additional source of revenue. The brokers Numis and Peel Hunt highlight Law Debenture, managed by James Henderson and Laura Foll, which has a portfolio of UK stocks like Rio Tinto and Royal Mail but also has a professional services arm. This is a year when protecting income means thinking differently.
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