The outlook is finally better for anyone who needs income from their investments. But it’s too early to shout hooray!
The Bank of England announced this week that it is removing the remaining “guardrails” that prevented banks from giving investors divi.
Yet these corporate payouts have been politicized. Companies were condemned for continuing to pay dividends during Covid – and this view will stick regardless of the demands of millions of private investors and pension savers.
Transition: Shell’s move from oil to renewable energy includes clean energy production and supply to large companies through lucrative long-term contracts
The Bank’s pandemic order to banks, forcing them to suspend dividends to ensure they had enough capital to support households and businesses, was eased in December, allowing limited payouts to build up, but not paid.
But the rule still cost the banks’ shareholders around £7.5bn, much of the £44.8bn in lost dividends resulting from the withdrawal or reduction of payouts by UK listed companies between June 2020 and March 2021, as the Link monitors UK Dividend Highlights.
This loss cannot be recovered. Amid the regrets, the quest for income will intensify, driven by the belief that dividend-paying stocks protect against inflation that is recovering in Britain and the US.
The banks are said to have had ‘a good crisis’, flooding them with cash and suggesting that shareholders can hope for a decent reward. Will Howlett, an analyst at Quilter Cheviot, prefers Barclays, whose investment bank is booming.
He warns that the extent of the generosity of this bank and its rivals will not be known in detail until early 2022.
In the meantime, their generosity may be limited by an economic setback, or the emergence of a new Covid variant.
It is also a source of cheer that AJ Bell now expects the members of the FTSE 100 to pay out about £76.9 billion this year, about £15.2 billion more than in 2020.
This may be well below the record £85.2bn donated to shareholders in 2018, but it could get a boost if Marks & Spencer and others resume payments.
In addition, 12 FTSE 100 companies have made £7.2bn this year from share buybacks: this is another way of returning money to shareholders.
Investors looking to improve their income can rely on AJ Bell’s stock list which is expected to deliver the highest returns in 2021.
Rio Tinto, the mining group, has an estimated return of 12 percent, although, as AJ Bell warns, this payout is not guaranteed.
Some investors will be reluctant on principle to invest in a miner. If not, BHP has an estimated return of 9.2 percent.
Amazingly, while there may be 12 percent more smokers in the world than in 1990, many investors will also have ethical concerns about British American Tobacco and Imperial Brands, despite their yields – 7.5 percent and 8.7 percent respectively.
Investors who aren’t keen on mining or smoking can find better opportunities with the UK’s dividend aristocrats, the companies with a consistent track record.
Ashtead, the rental equipment group, Croda, Diageo, National Grid and United Utilities are among this superior class of income stocks. Another option is Legal & General, which cannot be categorized as a dividend aristocrat because it has a more conservative policy on payouts.
But there is the chance of profit from another quarter. L&G shares are at the same level as in July 2015. Could the company’s growth finally be recognized?
Energy, whether produced by fossil fuels or by wind and solar energy, is another avenue for income. Shell’s strategy for the transition to renewable energy is another reason to support this oil giant.
The company plans to produce clean energy, as well as supply it to major corporations through lucrative long-term contracts.
It cut its dividend in 2020 but will resume payments earlier than forecast thanks to the recovery in crude oil prices.
The Greencoat Renewables investment trust is a bet on the money now flowing from clean energy. The 5 percent return is tempting, although the confidence is at a 17 percent premium.
If you want to spread your risk across all sectors, Ben Yearsley of Shore Financial suggests the Temple Bar Trust, which owns Shell and Natwest, and the JO Hambro UK Dynamic fund, which has interests in BP, Morrisons and DMGT, which owns the Daily. Mail.
As Investment Extra emphasized in April, the quest for higher income should extend beyond our borders. Chevron, Coca-Cola, McDonald’s and Pepsico appear in Credit Suisse’s new aristocrat division in the US with dividend yields above 2 percent and the potential to outperform.
Credit Suisse uses history to remind investors of the value of dividends: Since 1900, about 63 percent of the total return of the S&P 500 index has come from dividends. Dividends will take on a new significance in 2021.
Since no savings account now pays a rate higher than inflation, there is an even greater need for income.
May nothing stand in the way of ending the pandemic dividend drought!
Share of the week: Unilever
Marmite maker for years Unilever has lagged behind faster-growing rivals such as Nestle, which has left the stock price in a downtrend.
And while booming demand for products like Colman’s Mustard and Cif helped the company pay dividends during the pandemic, yields have fallen below 3 percent. At 4358p, the stock remains almost exactly where they were a year ago.
On Thursday, when the company reports its interim results, bosses hope they can convince investors that their plan to ditch stagnant brands and redirect energy and funds to areas of higher growth will work.
The city expects an important update on the sale of its £1.7 billion tea business, including PG Tips, which Unilever is expected to sell through an IPO or private sale by the end of the year.
A host of lower end European brands, with total sales of around £400m, will also be sold, which analysts believe could include the Simple soap range, Brylcreem hair cream, Matey bath soap and Brut 33 aftershave.
Unilever is also still in the market for additional acquisitions in growth areas, including premium skin care, cosmetics and plant foods.
But JP Morgan said Unilever has “not yet proven an improved ability to win”, adding that the investment bank is “unconvinced on the path to value creation through potential major mergers and acquisitions”.
For the first half of this year, analysts expect revenue growth of 5 to 6 percent, fueled by a recovery in beauty and personal care.
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