Dividends are drying up and investors are set to lose £35 BILLION

The UK stock market may be back in ‘bull’ rather than ‘bear’ territory, but I say pull the other one. This is more ‘cock and bull’ than bull, and will bring little comfort to the army of investors who rely on shares to provide them with an income. 

For these income-seekers, many dependent upon a regular stream of dividends to support them in retirement, the bear definitely rules. Dividends are becoming an endangered species, rarer than sightings of a passenger on the Wokingham to Reading bus (yes, I’ve been keeping a note while in lockdown). 

The dividend situation (or lack of it) is sobering whichever way you look at it – apologies if I now go on to spoil your Sunday if you are a member of the income investment army. 

Data released a few days ago by fund provider GraniteShares showed that of 176 dividend announcements made by UK-listed companies between mid-March and mid-April, only 14 confirmed the continued payment of a dividend. 

And of these, some were confirming dividends that had been reduced. The rest were the bearers of bad news – stating that dividends would either be cancelled or suspended as a result of the lockdown and economic fragility. 

Soberingly, Will Rhind, GraniteShares’ founder, predicted more cancellations, suspensions and reductions as UK plc fights tooth and nail to survive the current economic meltdown by preserving its precious cash. A prediction that sadly is proving correct. 

In the wake of the publication of GraniteShares’ research, Marks & Spencer (love the food, hate everything else about it) confirmed it was unlikely to pay a dividend in its current financial year, saving itself £210 million in the process. 

Sainsbury’s, a business you would have thought among the more resilient, said it was deferring a decision on its next dividend payment to a later date. Next, as well-run a retailer as you can find, also confirmed it is paying no dividend this year. 

But the greatest bombshell was dropped by oil giant Shell, the world’s biggest supplier of dividend income. 

Against a backdrop of a plunging oil price and economic shrinkage, it announced that it is making its first dividend cut since the Second World War. A move that prompted reactions from stock market analysts ranging from the blindingly obvious – ‘very unwelcome news’ (Hargreaves Lansdown) – to the overdramatic and somewhat inappropriate – ‘a two-thirds cut in its dividend is not surgical precision, it’s amputation, and is more evidence of the appalling damage the pandemic is doing to the world economy’ (Link, author of the UK Dividend Monitor). 

So, the immediate future is nothing but bleak for investors in need of dividend income – and for those who use it to reinvest and buy more shares. Indeed, Link believes that UK dividends in total could fall by 36 per cent this year, from £98.5 billion to £63 billion – a drop of more than £35 billion.   

Methinks the cut could be deeper (sorry), but ignore me – journalists by their nature are pessimistic human beings. Yet, are there any dividend sweet spots for income investors to latch on to? The answer is yes, though they are few and far between. 

As Russ Mould, investment director of wealth manager AJ Bell, warns: ‘Few sectors or companies can be seen as safe from dividend cuts. Nor are investors likely to thank a company’s management if they strain every sinew to make a short-term dividend payment to the potential detriment of the company’s long-term financial health.’ A good point. 

Last week, I asked Mould and a number of other market analysts to identify the most robust, dividend-friendly firms listed on the UK stock market. 

They all agreed to do so, but with the proviso that I must stress there are no givens when it comes to investments. Absolutely. 

Nobody – not even politicians, business leaders, economists – knows how the next few months will pan out as the country emerges from lockdown or how the stock market will react as a catalogue of woeful corporate news is revealed. The dividend tap could be turned off entirely. Or the sluice gates could open and steady dividend flow could be restored.

HOUSEHOLD GOODS AND FOOD RETAILERS 

Analysts at Canaccord Genuity Wealth Management have identified a number of firms they believe have the most ‘reliable’ dividends. Many are food retailers or suppliers or makers of products that still sell in lockdown. 

These include Unilever, one of the world’s biggest suppliers of consumer goods. Simon McGarry, a senior equity analyst at Canaccord, says: ‘Less than 15 per cent of Unilever’s products are consumed away from the home, and its mass-market portfolio should do well in the event that hard-pressed consumers look to trade down in a global recession. 

‘Clearly, Unilever brands such as Ben & Jerry’s ice cream won’t be doing very well at the moment, but the likes of Marmite, Colman’s, PG Tips and home cleaning products such as Domestos, Persil and Dove will be going down a storm. As will Lifebuoy, a handwash solution.’ 

Unilever has already announced a first quarter dividend for this year that is 1.9 per cent up on the same time last year. Its dividends equate to a yearly income of 3.5 per cent. Richard Hunter, head of markets at wealth manager Interactive Investor, likes Reckitt Benckiser for similar reasons.  

The company’s products include Dettol, Lysol, Nurofen, Harpic and Strepsils – all in great demand in recent weeks. ‘It’s a good defensive stock,’ says Hunter, ‘and its latest trading update indicated that it could have a better year than expected. So far this year, the shares are up 7 per cent, compared to a 20 per cent slide in the FTSE100 Index.’ 

Reckitt pays dividends halfyearly – its last payment was up 1.4 per cent on the equivalent payment 12 months earlier. Its payments equate to an annual income of 2.6 per cent and Hunter says the divi ‘does not seem to be under threat’. 

AJ Bell’s Mould is reassured by the robustness of drinks giant Diageo and tobacco firms BAT and Imperial Brands. ‘These sin stocks are still generating enough cash to support their dividends,’ he says. 

Mould also likes the strong trading conditions being seen by Tesco. All four of these companies also get on to McGarry’s ‘reliable’ dividend list. On Tesco, he says: ‘As restaurants, cafes and coffee shops have closed, consumers are now consuming all their calories at home. 

‘This is a massive boost for food retailers such as Tesco, and suppliers such as Premier Foods, maker of Kipling Cakes and Bisto Gravy.’

HEALTHCARE AND UTILITY STOCKS 

Healthcare giants GlaxoSmithKline and AstraZeneca are seen as dividend-robust by analysts. Mould says AstraZeneca’s cashflow looks to be ‘blossoming’ at just the right time while GSK’s chief executive Emma Walmsley has committed to paying 80p per share (its share price is currently £16.11) in dividends for this year – the same as in the past four years. 

Last week, the firm announced a first quarter dividend of 19p, just like last year. Interactive Investor’s Hunter also likes the resilience of many utility firms, such as Severn Trent, United Utilities and SSE. 

He says: ‘No matter what the state of the economy, people will always need water and power. Given the dependable cash-flow from bill-paying customers, their dividend paying abilities are highly prized, particularly in this era of ultra-low interest rates.’ 

Mould agrees, but warns that if unemployment rises bad debts could throw a spanner in the works. Other mentions by our analysts include Primary Health Properties. Its record of dividend growth goes back more than 20 years. 

A landlord for GPs and pharmacies, it has ’90 per cent of its rent ultimately funded by Government’ says Nicholas Hyett at Hargreaves Lansdown. Commodity giant Rio Tinto, AIM stock Emis – a software provider to GP surgeries – and asset manager Standard Life Aberdeen also get honourable mentions.

…and don’t forget trusts 

No article on dividend income would be complete without a mention of income-friendly investment trusts. 

Through prudent management of the income they receive from their holdings, many have a track record of unbroken dividend growth going back years. 

Teodor Dilov, fund analyst at Interactive Investor, says City of London, managed by investment house Janus Henderson, is his favourite. 

He says: ‘It has just reassured investors that it is in a position to increase its dividend for a 54th year.’ The dividend yield is a healthy 5.5 per cent.