19 of the most reliable UK dividend shares to weather the storm

We explain which shares stand a relatively good chance of holding on to their dividend payments during the current crisis.

Income investors in the UK are currently facing a tough time. With the economy in lockdown and the earnings potential of companies diminished, scores of businesses have had to scale back the amount they are handing over to investors in the form of dividends.

Most prominently, banks have all agreed to pause dividend payments, at the request of the Bank of England, in order to ensure they have maximum capacity to lend in order to support the economy.

Insurers have followed suit, with Avia, RSA, Direct Line and Hiscox, all today announcing (8 April) that dividends will be scrapped.

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Unfortunately, with economic conditions not looking likely to pick up anytime soon, investors can expect further dividend cuts. As Duncan Burden, head of manager research at Stamford Associates, points out: “It is almost certain that more and more companies will cut or suspend dividend payments over the coming months, as a direct reaction to the economic implications of Covid-19.” Burden adds that prices of FTSE 100 dividend futures contracts suggest the market currently believes approximately 60% of the UK market’s dividends to be at risk in 2020 and 2021.

However, income investors should not lose all hope. According to Simon McGarry, head of UK equity research Canaccord Genuity, the shares in the table below stand a relatively good chance of holding on to their dividend payments during the current crisis.

Tobacco companies BAT and Imperial are likely to hold on to their dividends. Being highly cash generative, tobacco companies tend to pay reliable dividends.

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McGarry notes the sector has not seen much of decline in demand since the start of the economic lockdown. Indeed, worldwide tobacco companies have seen a boost to sales. “There’s a lot of people sitting at home where they can smoke as much as they want rather than at an office where they can’t smoke, so that’s meant some increase in demand,” says McGarry. BAT currently yields 8.3%, while Imperial is on an even more notable yield of 12.3%

Another area likely to be able to hold their dividends is food retailers. McGarry says: “Food retailers should be fine. Sainsbury’s and Tesco should be fine. They are doing good business. There’s a billion pounds worth of food sitting in people’s kitchens.” However, he warns that if the lockdown does start to see impact on supply chains there could be some problems.

Job Curtis, manager of City of London, also views food retailers as likely to be able to hold their dividends. He notes: “Food retailers received a boost to sales and additions were made to City of London’s stakes in J Sainsbury and Morrison.”

McGarry also says that consumer staples such as Unilever should hold up well. The company has a relatively generous yield of 3.8% and over the past three months has fallen by only 7%.

The confidence in consumer staples is also endorsed by Curtis, who notes: “Overall, defensive holdings in the portfolio we have been adding to, such as consumer staples companies and utilities, where there is, in our view, least danger to dividends.”

Perhaps counterintuitively given their share price declines, miners and oil companies should also be able to hold their dividends, says McGarry.

“Miners such as Rio Tinto and BHP should be fine,” McGarry notes. While the price of some commodities has declined others have held up. McGarry points out that iron is currently $80 a tonne. Rio Tinto is currently yielding 6.8% and BHP 8.3%.

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Meanwhile, he argues that oil companies such as BP and Royal Dutch Shell should both hold their dividend for at least this year. “BP and Shell have raised substantial liquidity,” he notes. While it all depends on how long the price war goes on, if oil manages to get back to $50 a barrel, he expects both companies to be easily able to cover their dividend. Both are currently on yields of around 10%.

Added to this, he says that as Shell has not cut its dividend since 1945 it will be reluctance to do so anytime soon. “Shell know that people invest for the dividend. They’ll sit tight for the time being.”

Of course, McGarry notes if this time next year demand for oil is still down the roughly 25% that it is right now and the Russia-Saudi price war has not concluded, there could be some trouble.

McGarry also expects asset managers Schroders and Aberdeen Standard Life to keep paying dividends. When it comes to Schroders he notes that it has a strong balance sheet and excess capital, putting it in a strong position to continue to pay its dividend. Schroders has a yield of 4.9%.

Meanwhile, Aberdeen Standard Life is currently selling its Indian life insurance business, the proceeds of which should go to shareholders via dividend payments. The company currently has a yield of over 10%.

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Online trading companies such as IG and Plus 500 are less known for their dividend paying potential. However, given the enhanced volatility and the ability of such companies to continue to make profits, McGarry believes they are worth mentioning. IG is currently on a yield of 6.5% and Plus 500 4.4%. The latter has also managed to see a 30% share price increase over the past three months, while IG has declined by just 5%. “Plus 500 takes positions against clients. IG don’t, they hedge. Therefore, IG sees less of tailwind when markets tank compared to Plus 500.”

Dividend cover – why it is important

This is considered a key metric to assess whether a company is in a healthy position to distribute dividends. It is calculated by dividing earnings per share (EPS) by the dividend per share (DPS).

As a rule of thumb, a low dividend cover ratio – around one times or lower – suggests dividends are vulnerable, as the company is using most if not all of its profits to fund the dividend. A figure of two or more is viewed as comfortable because it is a sign the business is not over-distributing.

Those firms that do hand back more cash than they can afford risk damaging their longer-term growth prospects through lack of investment in the business.