How to boost your income during the dividend drought: Payouts from FTSE 100 firms are forecast to fall 24% this year… but there are ways to ease the pain
- Take a longer-term rather than short-term view for your financial returns
- Make sure you invest with your future financial needs in mind
Amongst all the other frightening news this year have been regular headlines in the business pages about companies cutting dividends.
This is followed by news that a dividend is being reduced, maybe by just a few pence, as Shell did earlier in the year.
Frankly, compared to all the other economic news around the globe this would seem to be of limited relevance to most of us – but that would be wrong.
Dividend payments for the FTSE 100 companies are forecast to fall 24 per cent – or £18 billion – in 2020 to around £63bn, the lowest since 2015
It should be of great significance to virtually everyone.
It is in fact those few pennies of dividends per share that are so important over time. They may not look or sound much but they can dramatically affect the value of all our long-term investments.
So the news this year that both Shell which paid 5.18 per cent last year and BP, which gave out 6.94 per cent, were missing their dividends was bad news for us not just as direct investors, but also for the many of us with pensions with investment companies, who depend upon the compounding of these dividends to give us the financial security we had hoped.
Dividend payments for the FTSE 100 companies are forecast to fall 24 per cent – or £18billion – in 2020 to around £63billion, the lowest since 2015.
What this means is that the FTSE 100 is expected to yield 3.5 per cent for this year. However, in better news, this is expected to rise to 4.2 per cent in 2021.
Why does it matter?
If you had invested £10,000 in the FTSE 100 in 1986 and automatically reinvested any dividends received, your investment would have grown to £195,852 by the end of last year.
If, however, you had not done so and just taken your divis out in cash, the difference would be quite dramatic. You would only get £54,394 – a difference of £141,458.
Both Shell which paid 5.18 per cent last year and BP, which gave out 6.94 per cent, have cancelled their dividends this year
What should I do?
Investing is a long-term game. Short term, it is just punting.
So take a longer-term view for your financial returns and make sure they try to match up with what you anticipate will be your future financial needs.
This compounding of dividends may not be a certainty, but has shown itself to be far more reliable than picking next month’s winner.
Here are a couple of low-cost and quite reliable ways of addressing this.
First, you could just buy a very low-cost FTSE 100 Index tracker (ETF), or SPDR S&P UK Dividend Aristocrats ETF, which tracks the best dividend payers.
However, for greater consistency you would have to try hard to beat the City of London Investment Trust or Caledonia Investments, which feature on a short list of trusts which have increased their dividends each year for 50 years.
The compounding of dividends will still be the underlying generator of longer-term growth, albeit at a lower level, but after what we have been through that is quite encouraging.
It may sound dull, but in our uncertain economic and political world, I like dull – although I will keep wearing my not-so-dull scarlet braces.