Dividends will make a comeback

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.

MoneyWeek

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.