The new year brings fresh hope for dividends

RECENT estimates suggest UK dividends could be nearly 40 per cent lower in 2020 than in 2019. But with a vaccine on the cards, dividend investors may have something to celebrate this year.

Historically, juicy dividend yields were one of the most compelling reasons to buy oil and gas stocks. But this year’s drop in oil prices meant most were unable to maintain their dividends.

The pandemic wasn’t the only thing hanging over the sector’s head either. The ongoing shift to alternative energy is threatening long- term demand for oil. That means this year’s dividend cuts are likely to be a permanent fixture and although yields in the sector are still above average, they’re on thin ice moving forward.

Banks are another place investors typically hunt for big yields, but pressure from regulators saw dividends in the sector put on hold. In December, dividend restrictions were relaxed, paving the way for banks to resume their payouts – but not in full. They’re still required to keep dividend payments below a certain threshold. Those restrictions won’t last forever though.

The UK housing market was one of the few bright lights of 2020 – house prices saw their strongest growth in more than a decade. That was a boon for housebuilders and their yields are likely to remain attractive if the housing market remains on a firm footing.

Utilities have some of the heftiest dividend yields on the market. People will always need water, electricity and waste disposal. Profits are heavily regulated, which can make growth a struggle, but it does give management greater visibility and means dividends are about as reliable as they get.

Dividend stocks are a great way to build wealth steadily over time and they make for a good addition to a diversified portfolio. But as many people learnt this year, there’s no such thing as an iron- clad investment. The same is true for dividends.

A high yield on its own means very little if the business probably can’t afford to pay it in the long- run. “This article is designed for investors who make their own decisions without advice. If unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”