Buy FTSE 100 shares for dividends in 2020? When so many companies have suspended or cut them? Am I mad? Well, I’m a long-term dividend investor, and I don’t think I’m too crazy at all.
Buying now is not about the dividend yields currently available. No, it’s all about locking in higher effective rates for the years and decades ahead. I’m convinced dividends will recover once we find ourselves emerging on the far side of the Covid-19 crisis.
Banks will surely reinstate their annual payouts. Firms that have cut their dividends out of an abundance of caution will see optimism returning, won’t they? And I reckon those still offering strong dividends should go on to even greater strength.
Why do I think all that? Because the FTSE 100 has done exactly the same every single time we’ve had a stock market crash or an economic crisis in the past.
FTSE 100 dividend forecasts
According to AJ Bell‘s Dividend Dashboard, analysts expect the FTSE 100 to pay a total of £62bn in dividends in 2020. That’s a sizeable wad of cash, but it’s way down on the £91bn they had forecast at the start of the year. And it drops the forecast yield to 3.6%, from a start-of-year prediction of 4.7%. It’s all down to a predicted 35% fall in net profits in 2020.
I firmly believe that FTSE 100 dividends will recover. And that share prices will return to their long-term upwards path hand-in-hand with them. If you invest now, you’ll be buying future higher dividends, but you’ll only have to pay depressed 2020 share prices. That means higher yields on your initial purchase price.
Locking in better yields
Look at Barclays, for example. Barclays shares are down 48% so far in 2020. Along with the rest of the sector, the bank suspended its dividend, including the final payment planned for 2019. The last year for which Barclays paid its full dividend was 2018, and the 6.5p per share represented a yield of 4.3%.
Do you think the Barclays dividend will get back to 6.5p? I think it will, even if not this year or next. If you wait until the shares are back to 2018 levels, you’d get 4.3% again. But if you buy now, while the shares are down, you’d pocket 6.7%.
The same is true of any other depressed FTSE 100 share with its dividend cut. If and when it recovers, you’ll earn better effective yields if you buy while it’s cheap rather than waiting until it recovers.
The FTSE 100 itself
Let’s think back to that initial forecast of £91bn in dividend cash from the FTSE 100 for 2020. That was at the start of the year, when the index stood at around 7,500 points. And at the time, it would have represented a 4.7% yield. I don’t know when the Footsie will get back to paying £91bn, and it could be a few years. But if and when it does, those who buy now with the index around 5,900 points will enjoy an effective yield of 6%.
And that’s what I mean by locking in higher future dividend yields by buying when share prices are down.