UK equity analysts forecast that the dividend yields on FTSE 100 shares will rise by 24 per cent from 2.56 per cent to 3.17 per cent this year as the economy begins its recovery from the coronavirus recession, according to new research from Bowmore Asset Management.
Bowmore Asset Management’s research is based on a consensus of analysts’ views on how dividends will increase over the next year.
Bowmore Asset Management says many FTSE 100 companies took conservative approaches to dividends in 2020 to ensure their balance sheets weren’t put under too much pressure during the early stages of the coronavirus crisis.
Banks and oil & gas companies, two of the UK’s largest dividend paying sectors historically, were among the sectors to cut dividends the most aggressively in 2020, alongside the industries hardest hit by the lockdown restrictions, such as travel & leisure and commercial property. Banks were forced to suspend dividends at the height of Covid-19 crisis last March, with regulators believing they could have difficulty lending if dividends were continued to be paid.
HSBC and BT were among the largest FTSE 100 dividend payers to cut dividends in 2020, with each cancelling payments totalling more than GBP3 billion.
With the economy beginning to recover, many companies, including banks who have been allowed to resume dividend payments, are now announcing higher dividends to be paid this year. Barclays and Royal Dutch Shell are among the companies to already announce dividends to shareholders in 2021.
Charles Incledon, Client Director at Bowmore Asset Management, says: “It is hugely encouraging to see FTSE 100 dividends expected to rise this year. With the recent success of the UK vaccine roll out, the UK economy is now earmarked for a quicker and stronger rebound than was previously expected. As a result, investors should be able to look forward to more blue-chip companies announcing increased dividends in the months ahead.
“However, all investors would be wise to check whether a share’s dividend is well-covered by a company’s forecast earnings. Those companies that still have an unsustainably high dividend policy may not be bailed out by a recovering economy.”
“The ability of the large oil and gas companies to keep growing their dividends is heavily dependent on the price of oil. Investors will, therefore, need to keep an eye on global economic growth in the months ahead. Investors may also want to keep an eye on the banks’ loan books to see whether they start to deteriorate in the coming months.”
“The FTSE 100 has a strong reputation for providing investors with high yielding shares, attracting shareholders who are looking for that additional income. That reputation was dealt a severe blow by the lockdown and the economic shock it created. However, it does look like we are gradually returning to normal and that’ll go a long way to rehabilitating the reputation of the FTSE 100 providing steady dividend growth.”