Dividends paid by some of Britain’s biggest listed companies have rebounded strongly this year after the 2020 cuts.
And while Omicron casts a shadow over the immediate future, next year looks like another good year for investors who depend on dividends – either to supplement their retirement income or through reinvestments to increase value. of their wealth portfolios.
Wise men at investment platform AJ Bell have done some serious math on UK dividends over the holiday season – and the results will be music to investors’ ears.
Next year dividends will hit just under £ 84bn, according to AJ Bell
AJ Bell calculates that dividends paid by the 100 largest companies listed on the London Stock Exchange will be just under £ 82 billion this year, a 32% increase over the previous year, when de many companies had been forced by regulators to suspend dividends or simply could not afford to pay them.
Next year, dividends will rise, according to AJ Bell, to just under £ 84 billion, a modest 2% year-on-year increase. In 2023, the increase in dividends will be around 1.3%.
Of course, these figures are only indicative. They are ignoring the one-time special dividends many investors have enjoyed this year as large listed companies have returned cash surpluses to them, like Next, mining giant Rio Tinto and Tesco.
And, as 2020 has demonstrated, economic events can seriously upend the dividend basket.
This is a point recognized by Russ Mold, director of investments at AJ Bell. He says: “A further decline in economic activity – for whatever reason – could still pose a big risk for dividends.
Likewise, a surprisingly strong economic recovery, and one that pushes commodity prices up as inflation sets in, could leave oil and mining companies and, by extension, the FTSE 100 in the dividend clover – a great news for income investors.
The FTSE 100 index is expected to return just over 4% next year, compared to 3.5% currently. This implies an effective return on income for investors of 4.1 percent in the following year.
These companies should continue to increase their dividend next year
Although below the current inflation rate, which peaks in a decade of 5.1%, it is a better return on income than cash (regardless of the rise in the base rate during the week). last at 0.25%) and most other assets.
There is also the possibility of making gains from rising stock prices (likewise, there is the risk of incurring losses).
According to forecasts by market analysts, the biggest payers next year will be mining giants BHP and Rio Tinto, Shell, tobacco giant BAT and bank HSBC.
For investors who wish to earn income from UK stocks, there are different approaches to take.
1. Buy the FTSE 100 index via a fund
The simplest strategy is to buy an investment fund that tracks the performance of the FTSE 100 Index – investors receiving income based on the dividend yield of the market as a whole.
Popular funds include publicly traded iShares Core FTSE 100, Legal & General UK 100 Index, and Vanguard FTSE 100. All can be bought through major investment platforms such as Hargreaves Lansdown, Interactive Investor and AJ Bell. The total annual charges are the lowest at 0.06%, 0.07% and 0.06% respectively.
For investors who want income paid out, iShares distributes income quarterly, L&G semi-annually, and Vanguard annually.
For those who prefer not to earn income at this time, L&G and Vanguard offer “capitalization” share classes that automatically accumulate any income – its value being reflected in the share price.
Investors who want a wider exposure to the UK stock market can opt for a fund that replicates the FTSE All-Share index such as Fidelity Index UK.
But the income will be slightly lower due to the fact that the dividend yield on the FTSE All-Share (3.2 percent) is lower than that on the FTSE 100. The Fidelity fund pays quarterly income.
The Vanguard FTSE UK Equity Income Index tracks the performance of companies across the UK stock market – 89 in total – that are likely to pay above-average dividends. The annual ongoing charges for this fund are higher than those of other UK trackers at 0.14 percent.
2. Buy stocks that increase income
A number of FTSE 100 companies have long paid their shareholders a steadily increasing dividend – even increasing payouts in 2020 when stock market dividends plummeted.
With the exception of BAT, all of these dividend-friendly companies have also achieved above-market equity returns over the past ten years.
AJ Bell says 15 FTSE 100 companies increased their dividend payments every year between 2011 and 2020 – and are expected to do so again this year (some have yet to report their final dividend payments for 2021) and the year next. Key details on the 15 are listed in the table above.
AJ Bell’s Mold said, “History suggests that the most profitable stocks aren’t the best long-term investments.
“Long-term top performers are often found among companies with the best long-term dividend growth records. They offer a winning combination of higher dividends and a higher share price. ‘
As the table shows, some of these dividend growth stocks still offer modest returns (less than 1% in some cases). This suggests that their ability to maintain growing dividends remains high.
3. Buy an income-friendly stock stung by an expert
Last week, MoS asked four income experts to name their preferred income-oriented FTSE 100 stocks for 2022. Experts are AJ Bell’s Mold, Andy Murphy (director of investment research firm Edison Group), Mark Wilson (equity analyst at broker Killik & Co) and Susannah Streeter, analyst at Hargreaves Lansdown.
Mold opts for Shell, recognizing that its choice “will not win friends among ethical investors”. But he says next year’s expected dividend yield of 4.4% “will help protect investor cash from the ravages of inflation.”
Nelson likes Tesco – a 3.5% dividend yield – because of its dominance in food retailing despite competition from German discounters Aldi and Lidl.
Streeter’s choices include Legal & General – “a diverse set of income streams supporting the ability to pay dividends” – National Grid and Unilever. Over the next 12 months, the potential dividend yield of these three companies is 7.1%, 5.2% and 3.9% respectively.
Edison’s Murphy opts for builders Persimmon and Barratt Developments, whose shares are trading 8% and 5.7%, respectively.
Both, he says, generate enough profit to give them the opportunity to increase their dividends.
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