2020 was a complete washout for many dividend investors. The number of UK shares which cut, postponed, or cancelled shareholder payouts numbered more than 500. Equally staggering was the decision by just over half of the FTSE 100 to take drastic dividend action following the Covid-19 outbreak.
The uncertain economic outlook means share investors need to remain extremely careful buying dividend shares in 2021 too. Let me talk you through some of my favourite UK dividend shares for 2021. I reckon they’ll pay out hugely this year, whatever happens to the broader global economy.
A great UK dividend share in tough times
Utilities stocks aren’t the most attractive UK shares when the economy is hunky dory. They don’t get to enjoy the ripping earnings growth that countless other stocks experience during the good times. However, in tough periods like these, the utilities really come into their own.
As the experts over at Hargreaves Lansdown note: “Sometimes boring can be best… heavily regulated profits mean growth is hard to come by but can translate into predictable revenues.”
This supreme earnings visibility gives them the clout and the confidence to pay big dividends during economic upturns and downturns. The utilities have certainly shown their robustness over the past year while dividends elsewhere have fallen thick and fast.
One UK dividend share I’m a big fan of today is United Utilities (LSE: UU). The water supplier has continued to lift shareholder rewards in recent months despite some Covid-19-related pressure. And it plans to keep raising annual dividends in line with consumer price inflation (CPI) during the current AMP7 regulatory period. This gives investors happy expectations through to 2025.
The United Utilities forward dividend yield sits a shade below 5% right now. Okay, dividend cover of 1.1 times doesn’t come close to the widely-accepted security watermark of 2 times. But UK share investors can believe the company’s sector-best balance sheet will allow it to keep hiking dividends regardless of this. The FTSE 100 company has a robust A3 stable credit rating with Moody’s and has no pension worries to weigh it down.
Another FTSE 100 power play
Investing in utilities such as Centrica isn’t as secure, in my opinion. Electricity providers have been subject to much harder regulatory scrutiny in recent years which stalk future earnings and dividend growth. They’re also subject to intensifying competition that’s steadily eroding their customer bases.
I don’t think UK share investors need to give the power plays a complete blank though. This is because I’d very happily invest my own cash in National Grid today, a FTSE 100 company that has a stranglehold on keeping Britain’s power electricity grid up and running. This gives it an extra layer of security alongside its classically-defensive operations.
And, like United Utilities, it also has a rock-solid balance sheet to keep the big dividends coming. I’d buy National Grid because of its 5.8% forward dividend yield and hold it forever.