Dividends will make a comeback
It's been a miserable year for income investors. But recent months have brought signs that dividends will return to normal.
This year has been a miserable one for income seekers, says Russ Mould of AJ Bell. FTSE 100 firms have collectively “cut, deferred or cancelled” more than £37bn in dividends this year. Yet recent months have brought signs of a return to normal. Sixteen firms have reinstated payouts amounting to £2.7bn for this year or next.
Expect total FTSE 100 payouts to rise from £59.9bn this year to £70.8bn in 2021. The UK market remains reliant on a few dividend stalwarts: 54% of 2020 dividends will come from just ten firms, including BP, Rio Tinto and GlaxoSmithKline. Overall, the FTSE 100 yields 3.2% for 2020 and 3.8% for 2021.
US companies prefer stock buybacks – when a company purchases its own stocks, driving up the price – to dividends, notes Spencer Jakab in The Wall Street Journal. The result is that dividends accounted for just 17% of the total return enjoyed by S&P 500 investors during the past decade. But during gloomy periods they come into their own; they accounted for 73% of returns during the 1970s. That is partly because regular dividend-payers tend to be more careful stewards of investors’ capital. It is also because in “bleak times” dividend re-investment becomes crucial. Reinvested dividends compound. The Barclays Equity Gilt Study notes that £100 invested in British stocks in 1899 would be worth £35,790 today in real terms with dividends re-invested. Without reinvestment? £193.