2020 will go down in history as the year in which FTSE 100 dividends were devastated. But that doesn’t mean dividend investing is dead. Far from it. I say we’re looking at a fantastic time to tune your ISA investing to build a great future income stream.
This year, Royal Dutch Shell (LSE: RDSB) did the unimaginable. It slashed its dividend for the first time since the end of World War II. Out goes the steady $1.88 (£1.48) per year that’s been providing yields of more than 6%. And in comes a rebased 64 cents (50p).
The Shell share price is down 45% in 2020, so that still offers a healthy yield of 4.1% to investors buying now. But if you’d bought at the start of the year you’d be looking at only around 2.2%. Do I think the Shell dividend and share price will come back strongly? I do, though perhaps not as strongly as the most bullish people are hoping. But I see it beating the fears of the bears.
The oil price is recovering as the world emerges from lockdown, but we might have to wait a while for better Shell dividends. But even a 20% dividend gain would push the yield to 5% on today’s price. I say buy now while we’re in the grip of pessimism.
Big FTSE 100 yield
As a shareholder, I’m tempted to recommend Aviva with its forecast yield of 10%. That’s boosted by the 30% share price crash this year, and could be a short-term opportunity. But the instability that’s seen Aviva cut its dividend three times in recent years turns me to Legal & General (LSE: LGEN) instead.
From Legal & General we’re expecting a lower yield of 8% this year, but that’s still impressive. Based on the start-of-year share price, the forecast dividend would have yielded 5.8%. So that shows again the benefit of buying dividend shares when they’re cheap, and locking in years of higher yields.
Every £1,000 invested at a return of 5.8% would turn into nearly £3,100 in 10 years (with dividends reinvested). But if you get in when the yield is up at 8%, that grand would end up worth nearly £4,700. Of course, an 8% dividend might not be maintained, and the year could end up tough for Legal & General. But you’d still pocket a lot more dividend cash buying when the shares are down.
No dividend at all
How about going for stocks with no dividend at all right now, but with future potential? Like the banks, which were forced to suspend their dividends by the Prudential Regulation Authority.
I’m thinking of HSBC Holdings (LSE: HSBA) today. I think it’s probably right for UK-centric banks to have withheld their dividends. But I don’t see a lot of sense in HSBC having to suspend its payments when its business is almost totally unrelated to the UK economy.
HSBC shares are down around 35% year-to-date. Had the bank been allowed to maintain its payouts at previous levels, shareholders would be looking forward to a 2020 yield of more than 10% on the current share price.
Should HSBC get back to that level when it’s allowed to, that’s what you could lock in today. But even if HSBC’s dividends take a little while to recover fully, I still think it’s a great time to bag some good long-term yields by buying now.