2020 has been a bad year for dividends. The Covid-19 crisis has forced many companies to reduce or suspend their payments. The banks had little choice under the control of the PRA. But many others followed as the focus turned to protecting balance sheets. From a forecast of 4.7% in January, the FTSE 100 now looks set to yield only around 3.2%.
But I think 2021 could be the start of another long run for progressive dividends. So out of those still being paid, and ones likely to be restored in 2021, which are my favourites? Here are three on my 2021 list.
Dividend bouncing back
In April, BAE Systems (LSE: BA) announced the deferral of its 2019 final dividend. The company had earlier set the full dividend at 23.2p, up 4.5% over 2018. But after seeing the early effects of the pandemic, the board decided to wait and watch the growing uncertainty. BAE’s balance sheet looked fine, but I think it was a wise move. I don’t like companies that prioritise paying their dividends above all else.
An update in November revealed a surprisingly good year. Order intake expectations were actually better than BAE’s pre-pandemic hopes. And the firm reckoned full-year earnings per share should be slightly better than previous guidance. That suggests a very modest drop on 2019, which should support a dividend resumption. Forecasts suggest a 4.7% yield for 2021, covered close to 1.9 times.
BAE has a large order backlog, and says it expects to deliver “strong and profitable top line growth with increasing cash conversion in the coming years“. I’d buy.
Financial dividend
While many financial firms were suspending their dividends, Legal & General (LSE: LGEN) held firm. In a November update, the insurer told us it intends to keep the dividend flat this year. It described 2020 as a pause year which, compared to many, is an enviable position to be in. From 2021, the company will target dividend growth in low to mid-single digits.
With a forward yield on the current share price of around 6.9%, even just keeping up with inflation in the long term will be a fine dividend performance. Can it do it? For the period 2020–24, Legal & General says it aims “to generate £8.0-9.0bn both of cash and capital, and to dividend £5.6-5.9bn“.
So that’s a top dividend yield, with an inflation-beating progressive strategy, coupled with a conservative balance sheet approach. And that’s from a company with shares on a forecast price-to-earnings ratio of just 9. What’s not to like?
A brief income pause
There’s something remarkable about dividends at Taylor Wimpey (LSE: TW). The Covid-19 pandemic hit the 2019 payout, and is set to do even worse to 2020’s. But if forecasts are accurate, by 2021 we’ll still have seen a quadrupling of the dividend in just six years. How’s that for progressive?
The housebuilding industry can be cyclical, and we will certainly see down years. But I think the sector makes a cracking investment. There’s one good reason: we’re in the midst of a long-term housing shortage, providing demand into the foreseeable future.
This year’s predicted dividend would yield only around 1.8%. But for 2021, the City is expecting a 4.7% yield. That’s from shares on a P/E of 10.5. I already hold Persimmon shares, but I like the look of Taylor Wimpey too.