The headlines this week have been filled with stories of a stock market crash.
By market close on Thursday, the FTSE 100 sat at 6,796.4 points. That’s a fall of 609.5 points over the course of the week, or 8.2%. And as fears of the coronavirus spread faster than the tiny critter itself (if you can even call it a critter), stock markets have been slumping around the world.
A decline of 8.2% is a huge slip by index standards. The Footsie is still a bit above the level it commanded at the end of 2018, though. And Thursday’s 6,796.4 points is still way ahead of the 5,500 point levels we saw in February 2016.
Now, while we’re nowhere near a Great Depression-style crash, the week has still shaken investors to their bones. We could well be in for more carnage, but I’m always contrarian when I see panic-led stock market weakness. I reckon this week has opened up some cracking buying opportunities. And if things go well next week, or maybe I mean badly (depending on your viewpoint), we could see even more share price bargains lining themselves up.
Record income
At the end of 2019, according to AJ Bell, the FTSE 100 was on for a 4.7% dividend yield in 2020. There was a total of £91.1bn expected to be handed out, based on aggregating forecasts from the investing world. That would be a record total, and a yield of 4.7% would be significantly higher than the long-term average.
Despite our economic uncertainties, companies have been slowly growing their earnings in recent years. And that’s allowed many of them to keep boosting their dividends. But as share prices have been lagging, the yields have been gradually escalating. The share price weakness has been for all sorts of reasons. But Brexit is big among them, and trade conflict between the US and China hasn’t been helping.
Now, if that mooted 4.7% wasn’t enough to tempt you into buying shares, let’s look at where we are today.
Since the end of 2019, the FTSE 100 has fallen by 10.1% (and, incidentally, the FTSE 250 has dropped by almost exactly the same amount). That’s pushed the expected overall dividend yield for the FTSE 100 up to a whopping 5.2%.
Dividend pressure?
That does assume that dividend forecasts remain unchanged, and in the light of possible business impact from the coronavirus spread that might not be so. But I actually think overall dividends will remain strong, even if some individual ones might decline a little. That’s for two main reasons.
One is that the virus effect will almost certainly be short term. Sure, it might last months, but against an investment horizon of, say, five years (which is the absolute minimum I’d contemplate), that’s not long. I doubt there will be any lasting effect on any FTSE 100 companies.
Secondly, companies will surely be very reluctant to cut their dividends in the short term, even if they might have a tougher year than expected.
The bottom line for me is that I see this week’s crash as helping us lock in some great dividend yields. And if it continues next week, we could see some even better potential income buys lined up.