How to survive the DIVIDEND DROUGHT

If you are one of the many investors who need an income, prepare for a little good news.

A few big name firms have resumed paying dividends, and there are some generous yields on offer.

This will come as a relief to those who feared that the dividend drought created by Covid-19 could become a permanent condition.

The risk was that a belief dividend payments were socially irresponsible – and even unpatriotic – would take root.

Relief, however, is more appropriate than celebration.

Payouts from UK companies fell by 57pc in the second quarter, as businesses responded to the pandemic. Cuts, suspensions and cancellations add up to at least £25bn and almost the same again is at risk. But, to give some consolation, as much as £31bn may still be safe.

In the last few days, the previously bountiful gusher BP and insurance giant Prudential have reduced their payouts.

But Legal & General, another fTSE 100 insurer, will be maintaining its interim payment while promising a final dividend in line with its ‘progressive’ policy. In City- speak: expect an increase.

L&G’s dividend yield – this is calculated by dividing the payouts declared in the past 12 months by the share price – is 7.47pc.

That’s very attractive when compared with the average for the footsie of 3.69pc and the 0.17pc yield on 10-year government giltedged stocks, or indeed the pitiful returns on savings accounts. L

& G’S brand is strong and its ESG (environmental, social and governance) expertise is in vogue. This speciality won it a £37bn mandate from Japan’s government pension scheme this year.

As Nigel Wilson, chief executive, puts it: ‘The brand is travelling well.’

The company may seem to be a staid insurer, but in reality it is a diversified enterprise that invests in lots of areas, including urban regeneration and housing. That could give it a strong role in postCovid reconstruction.

A high yield may look alluring but can be a warning sign, telling you that investors are demanding a higher income to compensate them for taking a higher risk. And divis that are deemed too high are apt to be cut.

Anyone drawn to the current yields on BP and Shell – 9.10pc and 8.24pc respectively – should prepare for lower payouts.

further out, BP is trying to transform itself from an oil company to a green energy business, and hopes that will provide long term growth, which in turn could generate rising dividends.

Other firms with above-average yields such as British American Tobacco (8.11pc) may not suit investors who don’t want to put their money into that industry.

Another member of Big Tobacco, Imperial Brands, has a yield of 14.61pc; its shares have tumbled from 1876p in January to 1274.5p, thanks in part to the US crackdown on its vaping products.

More evidence of a dash for income can be seen in the performance of fTSE 100 fund management firm M&G this week. Its profits slumped, but shares rose as investors chased the 10pc dividend yield.

Russ Mould of broker AJ Bell prefers firms with yields of 3-6pc, less eye-popping than the real high-yielders but more secure.

They include pharmaceuticals group GSK on just over 5pc, utility Severn Trent, yielding around 4pc, similar to supermarket Tesco. Mould also cites defence group BAE on 4.40pc and packaging company Smurfit Kappa on 2.67pc, which have revived their payouts.

If you are keen to maximise the income from your portfolio, you must reconcile yourself to taking extra risk and doing more homework. Useful sites for information include Hargreaves Lansdown and Dividend Data (dividenddata.co.uk). You need to check not only the yield, but also the dividend cover, a measure of a company’s ability to afford the payout. This is calculated by dividing earnings per share by the divi per share.

So if earnings are £10 and the dividend is £5 per share, the payout is comfortably covered twice over.

But if the earnings are £5 and the dividend is £10, the result is 0.5, the payment is not covered and investors should want to know why.

Some gurus will shun a share unless its dividend cover was greater than one in at least five of the last 10 years.

Alternatively, if you don’t want to pick your own shares, you can opt for an income fund or investment trust.

Their task is also harder given the widespread cuts, but Murray Income Investment Trust’s portfolio contains names committed to carry on paying.

James Carthew of analysis group Quoted Data says: ‘Only three companies in the top 20 holdings at the trust have cut their dividends.

‘They are Rentokil, Inchcape and Close Brothers, and the latter was forced to by the Bank of England.’

At this difficult moment, let’s be grateful for companies that value their shareholders and pay them a dividend.