Income investors lose £1.5bn, but FTSE stars deliver

Despite the dividend cull, there remain a number of blue-chip stocks rewarding investors with income. 

The financial pain caused by 2020's bonfire of the dividends will be felt this week when income investors get far smaller payments from the likes of Aviva (LSE:AV.), BP (LSE:BP.) and Anglo American (LSE:AAL). 

These high-yielding large-cap stocks are among an estimated three-quarters of companies who have cut or cancelled their dividends due to the impact of the coronavirus crisis.

Already this week, Royal Dutch Shell (LSE:RDSB) has paid shareholders just 16 cents, or 12.09p, for second quarter trading, compared with the 47 cents, or 38.01p, awarded last year and every September since 2014.

Next week will see tobacco giant Imperial Brands (LSE:IMB) shave its dividend payment by a third, with the introduction of a new dividend policy also set to mean Prudential investors will have to be satisfied with 4.17p a share.

The blow to investor incomes has been highly concentrated, with roughly 37% of all pay-outs in the FTSE All-Share previously generated by just five stocks, three of whom have since cut or cancelled their dividends — HSBC (LSE:HSBA), Royal Dutch Shell and Lloyds Banking Group (LSE:LLOY).

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Our own research shows that about £1.5 billion will not be paid to shareholders in the coming days due to dividend cuts by just four stocks —  Aviva, BP, Anglo American (LSE:AAL) and Imperial Brands.

All is not lost for income investors, however, given that other popular high-yielding plays in Legal & General (LSE:LGEN), Standard Life Aberdeen (LSE:SLA), GlaxoSmithKline (LSE:GSK) and Diageo (LSE:DGE) have all pledged to maintain their dividend levels. Across these eight stocks, which are now all ex-dividend, just under £4 billion is due to be paid rather than almost £5.5 billion for the same period last year.

Source: interactive investor

The list represents what would once have been the cream of the crop for income seekers. Some observers in the City, however, argue that a number of heavyweight UK dividends were looking vulnerable even before the Covid-19 crisis struck, given the shortage of earnings capacity or dividend cover needed to support levels of shareholder payments.

Some stocks have simply found themselves without cash on their balance sheets to maintain previous pay-out levels or just want spare cash in order to weather future uncertainty. In the case of the banks and most of the insurers, they were “encouraged” by the government to reduce dividends to ensure that they are sufficiently capitalised to meet regulatory obligations.

Aviva's 9% yield had been one of the best in the FTSE 100 index until Covid-19 put the proposed 2019 payment on ice. On Thursday it will be paying an interim 6p for 2019, which is equivalent to 28% of the original total.

Any awards linked to the 2020 performance, as well as the future of the rest of the deferred 2019 dividend, are due to be considered by the board later this year.

On the same day, however, Legal & General is making an unchanged 4.93p a share payment for a dividend yield of 9% that represents a blatant invitation to income-seeking investors. L&G pointed out its dividend paying capacity was underpinned by a strong balance sheet, with £7.3 billion in surplus regulatory capital and significant buffers to absorb a market downturn. 

Glaxo is also still fighting the corner for income investors, after it extended a record going back to 2014 by pledging to maintain the dividend for 2020 at the current level of 80p per share. This includes the 19p a share due to be paid on 8 October, the same day as drinks giant Diageo is set to award shareholders an unchanged 42.47p a share.

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Even at BP, where Friday's dividend payment will be halved to just above 4p a share, investors should remember that an implied yield of around 6% is particularly punchy in the current interest rate environment. In addition, BP’s new buyback strategy to return 60% of surplus cash also provides extra flexibility.

It's also worth noting that many dividends are in the process of being restored, with Land Securities (LSE:LAND) disclosing in July that it planned to announce an interim award alongside its results in November. And earlier this month, BAE Systems (LSE:BA.) paid the previously deferred 13.8p a share for 2019 trading, as well as 9.4p a share in relation to the first half of 2020.