One of the joys of owning shares, especially FTSE 100 stocks, is the cash payouts (dividends) regularly paid to their shareholder owners.
The joy of FTSE 100 dividends
For me, dividends also fundamentally undermine the claim that the stock market is a casino for gamblers. When I hear this, I quote legendary US fund manager Peter Lynch. He said, “A share is not a lottery ticket…it’s part-ownership of a business”.
For the record, the UK lottery pays out only half (50%) of ticket sales in prizes. In the gambling world, that’s known as a 50% ‘negative expectation’. Conversely, the regular cash dividends paid out to UK (mostly FTSE 100) shareholders last year totalled £110.5bn. That’s a near-5% positive yearly return (assuming no capital gains nor losses).
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FTSE 100 dividends devastated
So far, so good, but now for the bad news. This year, FTSE 100 dividends have been devastated thanks to Covid-19 and a lower oil price.
In the second quarter, FTSE 100 dividends crashed by 45%, and an even more drastic 76% for the FTSE 250. This is even worse than in the aftermath of the global financial crisis, when two-fifths of companies cut or cancelled their cash payouts.
For the second quarter of 2019, the top-five FTSE 100 dividend payers handed over £10.9bn in cash to their shareholders (page 9, PDF). These five dividend darlings accounted for almost three-tenths (29%) of all dividends paid by UK-listed companies in Q2/19. Wow.
In Q2/20, FTSE 100 dividends collapsed, with the top five paying out a mere £5.8bn, or 36% of all UK-listed company dividends. The year-on-year difference is £5.1bn, which is a huge body blow for income-seeking investors.
The five ‘big beasts’ for dividends
Due to the coronavirus, we’re living in a weird world, where it’s difficult see beyond the economic havoc that the virus has inflicted. One day, the world will emerge from this crisis, growth will resume, and corporate profitability will rebound. Then FTSE 100 dividends will grow again, as they did every year from 2015 to 2019.
Currently, these are the five biggest beasts among FTSE 100 dividend payers (note that BP announced today that it would halve its dividend, but still yields almost 5.4% a year):
Rank | Company | Description | Market value
#1 | Rio Tinto | Global miner | £80.9bn
#2 | BP | Oil supermajor | £57.0bn
#3 | British American Tobacco | Tobacco | £57.9bn
#4 | GlaxoSmithKline | Pharma | £79.6bn
#5 | Royal Dutch Shell | Oil supermajor | £98.3bn
As you can see, each of the FTSE 100’s big five is a mega-cap giant, and all are global leaders in their respective fields. Their sheer size and strength allow them to pay huge dividends, while still investing in and growing their businesses.
Decent dividends are the bedrock of portfolios
Earlier this week, I wrote that I wouldn’t recommend building a portfolio from only five shares. That’s because a five-share portfolio doesn’t offer anywhere near enough diversification (especially for income seekers). Also, two of the five (BP and Shell) are in the same sector, further increasing concentration risk.
However, if forced to, I would put a fair chunk of money into these five dividend dynamos. After all, I’ve recommended all five separately to readers in recent weeks. And I estimate that this FTSE 100 mini-portfolio’s dividend yield would exceed 6%. That’s a much greater return than playing the lottery!
