One joy of being a veteran value investor is watching dividends pile up. Dividends are cash payments made to shareholders, usually half-yearly or quarterly. These distributions can be taken as cash, or reinvested into more shares. Not all companies pay dividends, but most FTSE 100 firms do.
FTSE 100 dividends crashed in 2020
As Covid-19 spread in early 2020, many British businesses feared for their future. UK dividends slumped last year, as companies cut, cancelled or delayed payouts. Some of the biggest cuts came from UK banks and financial firms — and from oil supermajors BP and Royal Dutch Shell. Thus, the FTSE 100’s yearly dividend yield dived in 2020 for the first time in eight years.
According to Link Group’s Dividend Monitor, UK dividends collapsed by four-ninths (44%) to £61.9bn in 2020. This was the lowest annual total since 2011, wiping out eight years of dividend growth. Two-thirds of UK-listed companies cancelled or cut dividends in the last nine months of 2020. In total, Covid-19 cutbacks cost shareholders £39.5bn in lost dividends. Alas, Link forecasts that dividends will not fully return to 2019 levels until 2025 at the earliest. Ouch!
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Dividends bounce back in 2021
Yet happily, the market is starting to put 2020 behind it. Indeed, FTSE 100 dividends are expected to rise markedly this year, especially if a post-Covid-19 economic boom takes hold. One minor setback for dividend lovers was HSBC Holdings‘ decision not to pay a first-quarter dividend.
However, according to investment firm A J Bell, the number of companies raising or restoring their dividends in April vastly outnumbered those that cut back. Total dividends declared in April came to £3.1bn, with a further £0.2bn of dividends restored, against just £0.8bn of cuts versus 2020 (most of which was FTSE 100 giant BP). In aggregate, total dividends paid and restored now exceed by £20bn those cut or cancelled since Covid-19 swept the globe. This suggests that listed companies feel the worst may be behind them.
In 2020, dividends cut totalled £47.8bn, but this figure diminished to £3.8bn this calendar year. Therefore, dividend cuts in 2020/21 came to £51.6bn. In 2020, dividends maintained and restored totalled £36.7bn. But in 2021, this figure is already £36.1bn, for a total of £72.8bn in 2020/21. At last, it seems that the dividend train is gaining momentum, which is great news for owners of FTSE 100 stocks.
Share buybacks also stage a comeback
When companies buy back their shares in the open market, this reduces the number of shares in issue. As a result, earnings and dividends are distributed among fewer shares, generally making these stocks more valuable. So far in 2021, UK-listed companies have announced share buybacks totalling £7bn, with 10 FTSE 100 firms accounting for the lion’s share. In April alone, share buybacks announced totalled £3.2bn, with Unilever and BP joining the party.
What next for FTSE 100 dividends?
With dividend cuts peaking in March 2020 and most of the damage done by last July, the tide seems to have turned for these cash payments. Hence, A J Bell expects FTSE 100 dividends to total £74.2bn in 2021. That’s more than a fifth (21%) higher than 2020’s payout. With the Footsie hovering around 7,000 points, this equates to a forecast dividend yield of 3.7% for 2021. It may not be guaranteed, but it’s 37 times the Bank of England’s base rate of 0.1% a year. It also helps to explain why I think cheap FTSE 100 stocks could be the bargain buy of the next decade!
