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Investors to benefit as dividend tap ‘being turned back on’

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Investors are set to enjoy boosted dividend payments, with analysis from AJ Bell suggesting that the FTSE 100 firms will hand dividends worth a total of £74.3bn this year.

That equates to a yield of 3.8%, and is a sharp jump from the estimated payout of £61.4bn last year.  A rise this year would be the first year of dividend growth since 2018.

Disappearing dividends

2020 was a difficult year for investors looking for income from their investments, as businesses across all sorts of sectors pulled back on their dividend payments ‒ at least initially ‒ as the impact of the pandemic began to be felt.

A study by Link Group suggested that UK dividends were slashed by as much as 40% over the year due to Covid-19, to levels last seen in 2011, wiping out eight years of growth.

However, this trend appears to be reversing in 20201. AJ Bell noted that in the first three months of the year, 42 firms had declared or made a dividend payment, while 12 more had returned to the dividend list.

As a result, £23.8bn of dividends had been declared, compared to cuts worth just £2.8bn. And even those firms that did cut dividends ‒ Shell, BP, Evraz and Standard Life Aberdeen ‒ all at least paid something.

It argued that this mean the dividend tap was “being turned back on”.

Where should I look for dividends?

The AJ Bell analysis picked out the 10 businesses it expects to deliver the biggest dividend increases this year.

It noted that between them, these firms are forecast to provide three quarters of the £12.9bn dividend increase from 2020.

Here are those 10 businesses and the level of dividend increase expected:

Business Dividend increase in 2021 (£m)
Rio Tinto 2,688
BHP Group 1,451
HSBC 1,046
NatWest Group 969
Anglo American 966
Barclays 763
BT 694
Lloyds 659
Persimmon 398
Glencore 386

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

With Rio Tinto and BHP Billiton clear at the top, Russ Mould, investment director at AJ Bell, argues that income seekers need to keep an eye on the price of iron ore.

He also pointed to the presence of four banks in the list.

The banks’ total dividends are seen more than doubling to £7 billion from £3.3 billion in 2021 and then rising again to £9.3 billion in 2022. Those figures are still some way below the cyclical peaks of 2007 (£13.3 billion) and 2018 (£13.1 billion) so the lenders may offer some potential upside – although regulatory pressure, competition from fintech upstarts and record-low interest rates could yet weigh on net interest margins and limit their ability to increase shareholder distributions in a substantial and sustained manner.”

What about ethical investing?

It’s worth noting that many of the top dividend payers have dicey credentials when it comes to environmental, social and governance (ESG) factors. Investors have increasingly put more weight on how ‘ethical’ a firm is before backing them in recent years, but when it comes to dividends the biggest payers are unlikely to win too many ESG awards.

Mould pointed to the expectation that Rio Tinto will be the single biggest paying stock, but some investors may not view mining as being sufficiently ‘green’, adding that the presence of Shell and BP in the list of big payers may also have “ESG-oriented investors gnashing their teeth”.

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