Robert Stephens, CFA, discusses the income investing potential of 3 FTSE 100 stocks that have maintained dividends the face of the crisis.
The investing landscape has changed dramatically for income-seekers over the past few weeks. Previously, a plethora of FTSE 100 companies offered generous yields and the prospect of rising dividends over the long run. Now, many of them have cut, cancelled or delayed their dividend payments.
This leaves investors with far less choice when it comes to obtaining an income from the FTSE 100 in 2020. However, some companies still offer impressive income returns, in my opinion, despite Covid-19 risks. Here are three of them.
AstraZeneca (LON:AZN) may not have an impressive track record of dividend growth. Due to the patent cliff it has experienced in the last decade, its dividends per share are little-changed on their level from a decade ago.
However, the company’s pipeline is now starting to deliver growth that is likely to prompt it to pay a higher dividend. For example, its new medicines recorded 49% sales growth in Q1. Growing demand for treatments for non-communicable diseases such as cancer could spur the company’s sales to even higher levels, while its increasing presence in China and other emerging markets may strengthen its financial prospects.
AstraZeneca’s 15% share price rise in 2020 has depressed its yield to just 2.5%. But its capacity to raise dividends could make it a highly sought-after income option.
Utility companies such as SSE (LON:SSE) have been favoured by income investors for many years due to their defensive credentials. Their appeal increased after clarity on their future was provided in the 2019 general election, after which the risk of nationalisation has declined significantly.
Even though SSE stated in its latest trading update that it is too soon to forecast the impact of Covid-19 on its financial performance, the company is currently sticking to its five-year dividend plan. This should see its dividends per share rise annually at the same rate as RPI. Currently, the stock yields in excess of 6%.
SSE’s disposal of its domestic energy supply business at the start of 2020 and subsequent shift in investment towards renewable energy could be a sound strategic move. It may now have less consistency in its financial outlook, but could offer greater growth potential than many of its utility sector peers.
British American Tobacco
In times of economic uncertainty, tobacco stocks such as British American Tobacco (LON:BATS) have often been popular among income investors. The company has seen no impact on its financial performance from Covid-19 so far, and looks set to pay dividends as previously expected throughout 2020 and beyond. It yields over 7% at the moment.
BAT’s strategy of reducing debt and simplifying its operations could reduce its risks in an era where falling cigarette volumes and a shift in consumer tastes towards less harmful products are likely to persist.
In future, question marks about how it will replace long-term tobacco sales with other products may become less important to investors should the economic outlook deteriorate. The company’s ability to continually raise the prices of its leading brands and maintain a low cost-base may become more relevant to dividend investors who are in search of a reliable income.