A £9 billion dividend windfall now at risk

Dividend scarcity is a problem, and now there’s confusion for shareholders set to receive mega payouts.

In just a few short weeks, income investors have seen dividends either suspended or cancelled completely, as companies rush to conserve cash amid the unprecedented coronavirus lockdown.

Among the hardest hit have been the travel and transport companies, but capital-intensive industries like housebuilders have also stopped payouts to shareholders. With no idea when the crisis will end, or little clue what the final economic impact will be, businesses are having to prepare for the worst.

Some of the big banks are scheduled to pay massive dividends in the next few weeks, among them Barclays (LSE:BARC) and HSBC (LSE:HSBA). But, even at this late stage, there is confusion about whether the payout will go ahead as European banks scrap their dividends. Newly anointed Bank of England governor Andrew Bailey has called for lenders to prioritise customers over shareholders and, while a sensible call in the circumstances, many investors and City institutions argue that the payouts, which cover results for the 2019 financial year, should go ahead.  

We’ll see.

Elsewhere, might Land Securities (LSE:LAND) follow British Land (LSE:BLND) in shelving dividend plans? Will Irish building materials firm CRH (LSE:CRH) resist the temptation to save almost €500 million?

If they do pay out, these yield generators will provide a windfall for lucky shareholders in April. Over the next month, five FTSE 100 stocks – Barclays (LSE:BARC), Diageo (LSE:DGE), GlaxoSmithKline (LSE:GSK), HSBC (LSE:HSBA) and Rio Tinto (LSE:RIO) – are scheduled to pay dividends worth almost £8.5 billion. Assuming those pencilled in to pay dividends do so, total corporate payouts in the UK could exceed £9 billion next month.

HSBC’s dividend alone is worth well over £3 billion, and Rio Tinto more than £2 billion. Glaxo and Barclays are slated to return over £1 billion each to shareholders very soon.

FTSE 100 companies due to pay dividends in April 2020

Whatever the UK banks decide to do with their payouts for 2019, investors will likely have to get used to receiving their dividend income from a shrinking pool of stocks in the month ahead.

Richard Hunter, interactive investor’s head of markets, says:

“In particularly affected sectors, we are already hearing the understandable boardroom mantra that the next few months will be putting a severe strain on profits as revenues evaporate. The hospitality, tourism and travel sectors are especially prone to the coronavirus outbreak and the subsequent pressure on revenues means that dividends are an obvious way to reduce costs. Meanwhile, there are also questions around the previously untouchable oil majors, where the proud history of maintaining dividends may be a step too far – at least for a quarter or so – for BP (LSE:BP.) and Shell (LSE:RDSB) in the current environment.

“In addition, the first line of defence which is likely to fall is the propensity for companies to pay special dividends. By their nature, they are bonuses which can be withdrawn in the face of any economic pressure, usually without disgruntling investors. It is therefore reasonable to expect that the surge of special dividends (from the housebuilders in particular) could reduce to a trickle. As such, the search for dividend income may well be found in switching to a classically defensive strategy.

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“Companies such as Unilever (LSE:ULVR) (whose household brands include Comfort, Domestos, Dove and Vaseline) could benefit from the current propensity of consumers to hunker down and currently yields around 3.4%.

Similarly, Reckitt Benckiser (LSE:RB.) (Dettol, Disprin, Strepsils) yields around 2.8%. Elsewhere, the utility stocks can come into their own in parts of the economic cycle such as these, and examples within the FTSE 100 include SSE (LSE:SSE) (previously Scottish & Southern Energy), where the current dividend yield is 7.1% and United Utilities (LSE:UU.) 4.5%.

“An interesting observation would be to look at another such sector in the form of the supermarkets. Investors can expect financial caution here also, particularly given the sector’s tendency to have diversified away from just grocery, but these are clearly reaping some rewards at present. Not always the highest of yielders, the dividends may be maintained in the face of current trading, with William Morrison (LSE:MRW) presently yielding 3.7%, Tesco (LSE:TSCO) 2.9% and Sainsbury's (LSE:SBRY) 5.2%.”