I think this is a cracking time to buy income stocks. I even rate 2022 as one of the best years I can remember, if not the best.
It could be the second-highest year ever for FTSE 100 dividends. Forecast payments are close to £85bn. The biggest ever came in 2018, when FTSE 100 companies handed over £85.2bn.
So why wasn’t 2018 the best year to buy income stocks ever? Well, a lot of dividend-paying stocks are a good bit cheaper now, and that means bigger dividend yields. The total paid out might be lower this year. But for the same money, we can buy a bigger chunk of it.
Topping up
Someone told me they were going to top up on their investment in Persimmon shares. Their thinking went along the lines of: “The share price has fallen by half, I’m convinced it will pay good dividends over the long term, so I’ll lock in double the yield if I buy now.“
And that’s right. Anyone buying Persimmon shares now should double the effective dividend yield they get, on the cash they invest today, compared to someone who bought 12 months ago. That’s assuming the company prospers (which it might not). But for me, it’s what makes 2022 a better year for income investors than even the record dividend year of 2018.
So why isn’t everyone snapping up all these cheap dividend shares, and pushing prices back up? I see several reasons, mostly related to short-term fears.
Weaker confidence
Confidence in forecast dividends is dropping. As the cost of living keeps rising, and the economy looks bleak over the next 12 months, will dividends be cut? I’m sure some of them will.
A few have already slipped, notably the big miners in response to falling Chinese demand. Rio Tinto cut its interim dividend by 29%. It did, however, point out that it’s still its second-biggest ever.
Looking at things with a short-term view, I do see a strong possibility of further cuts in the coming months. And that raises one good reason for not piling into income shares right now. If dividends fall, share prices will probably fall further. And that means we could have even better buying opportunities in the future.
No timing here
But thinking that way is too close to trying to time the market for my liking, and I’m no good at that.
When I see FTSE 100 banks, like Lloyds and Barclays, on well-covered forecast dividend yields of 5% and growing, I just want to buy now.
The same goes for insurance companies, which I also think have a great long-term future, even if the next year might be painful. Aviva and Legal & General are forecast to yield more than 7%, and again, forecasts are rising.
Best year?
There are plenty more examples where depressed share prices are translating into higher dividend yields. And when shares are low, doesn’t that make it a great time to lock in some tasty long-term income?
I think this year probably is the best year for income investors that I can remember. There are clear short-term risks, though. But those might make 2023 an even better year.