8 defensive high yield shares that are resisting dividend cuts

Ben Hobson screens blue-chip and mid-cap stocks with a solid yield that might grow in the year ahead.

Three-quarters of the companies due to pay dividends in the second quarter of this year either cut or cancelled them altogether. In all, 176 shares ditched their dividends and 30 more pared them back. It was a predictable but nonetheless dramatic shift in the UK dividend landscape, forced by the impact of the Covid-19 pandemic. But is it all bad news?

Back in March, when analysts were totting up dividend payouts from Q1, it was already clear that the virus was causing havoc. Dividends are usually the first sacrifice in times of turmoil, so the near future was already looking bleak. Link Asset Services, which tracks UK dividends, said at the time a tsunami of cuts was probably on the way - and they were right.

Between April and June, dividends payouts halved (-50.2%) to £16.0 billion. Add the effects of cuts to expected special dividends, and the fall was 57.2% to £16.1 billion.

Why diversification makes sense

Beyond the headline stats, there are some interesting trends in the latest dividend data. It’s a reminder why equity diversification is important to think about when it comes to constructing a portfolio - especially a dividend one.

For a start, payouts from the top 100 shares in the UK fell by 45% in the second quarter. But look to the mid-cap 250 shares and the cuts soared to 76%. It seems that large-caps have managed to hold up better.

In terms of sectors, it’s no surprise that the oil industry suffered badly. With oil prices already under strain before the pandemic, a global lockdown simply made matters worse. Royal Dutch Shell (LSE:RDSB), the oil giant that hadn’t previously reduced its dividend since the Second World War was forced to take action - and its long term track record is over.

Elsewhere, Link points to major cuts across the industrials sector, including aviation, constriction, engineering and support services. Meanwhile, consumer cyclicals like housebuilders, media, travel leisure and, of course, retail, have all been hit badly. Apparently only four out of 55 companies in the cyclicals sector managed to keep their payouts intact in Q2.

But on the upside, defensive sectors like consumer discretionary, healthcare and utilities have done better. As one would hope from these industry areas that are supposed to be dependable in a crisis, there have been some positives. Among them, stocks that sell consumer must-haves like food manufacturers, food retailers, drinks, tobacco and personal items, have held up better - and it’s here where there are even signs of dividend growth in the near future.

With that in mind, we took the latest dividend data and screened the market this week for mid and large-cap companies that are on solid yields and dividend cover in defensive sectors. We also wanted to see evidence that dividends have at least been held or are forecast to grow in the coming year...

The results echo the data that there are dividends out there that have so far been able to withstand this massive economic shock. They range from the classic defensive play, British American Tobacco (LSE:BATS), to food makers and retailers like MHP (LSE:MHPC), Sainsbury's (LSE:SBRY) and Bakkavor (LSE:BAKK). Drax (LSE:DRX), the power generator, GlaxoSmithKline (LSE:GSK), the drugs giant and EMIS (LSE:EMIS), a much smaller healthcare tech specialist, also feature.

As for the outlook, Link analysts suggest the likely average yield over the next year will come in between 3.3% and 3.6%. Overall payouts for 2020 are set to fall by 39% at best and 43%. 

It has been a very dramatic experience for UK dividend investors but the rather more promising news is that some defensive dividend plays have done what many would have hoped - and that’s to maintain their payouts despite the disruption. It’s a reminder why sector diversification is worth taking seriously.

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