As Shell and BP dish out cash to investors – ride the £85bn dividend wave

Turning the Tide: Dividends are Investors’ Friends

Dividends are an investor’s friend. They feed the pension funds to which many workers contribute, while for many older investors they are an important source of income at a time when household budgets are constantly under attack by rising prices.

While dividends aren’t popular with everyone (particularly wealthy socialist politicians) and may cause controversy as happened last week with BP, they are an essential part of the arsenal. finances of most people.

Growing dividends are improving the wealth of many households – so we should salute them rather than criticize them. They are a bright spot, to counter the gloom caused by rising interest rates, soaring energy bills, recession fears and worrying (scary) geopolitical developments in the Far East and Ukraine.

In recent days, two of the biggest companies on the UK stock market – energy giant BP and mining giant Glencore – have declared dividends that will put a smile on the face of many shareholders.

More good news is expected this week when insurer Legal & General announces its financial results for the first half of this year. Analysts expect him to raise dividends by up to eight percent.

“It’s good to see companies like BP and Shell increasing their dividend payouts again,” said Simon Gergel, head of UK equities at asset manager Allianz Global Investors.

Shell’s latest quarterly dividend of $0.25 per share, declared last month, was an increase from the equivalent payout of $0.24 last year.

Gergel runs the £773million Merchants investment trust which invests in large UK companies, delivering high and growing income – as well as capital growth – to shareholders.

Like most managers who scour the UK market for earnings-friendly stocks, he refuses to be drawn into the debate over whether BP and Shell should be making money in spades – and paying dividends to shareholders – while households face record energy bills. BP and Shell are both the trust’s top 10 holdings.

“We buy companies where we think we can make a good total return,” says Gergel. “This concentration allowed us to buy and hold big energy companies in 2020 after they cut their dividends – and at a time when their shares were cheap. This helped the trust’s overall performance as these stocks rallied and started paying dividends again.

Thomas Moore of investment house Abrn and Sue Noffke of rival Schroders are more open.

Moore, chief investment officer, describes Shell and BP as having “compelling investment attractions”. He says the “prodigious” amounts of cash they generate “will support a growing dividend stream” while allowing them to invest heavily in clean energy projects. He also says that companies that generate strong cash flow tend to be rewarded with higher stock prices.

In terms of ESG (environmental, social and governance) issues, Moore thinks both companies are up to the task. He adds: “They are playing an important role in reducing Europe’s dependence on Russian oil, both through the supply of oil and gas – and through their investments in hydrogen and renewable energies.”

Noffke manages the £206m Schroder Income Growth Fund. Its largest holding – accounting for 9% of assets – is Shell.

She says Shell’s dividend payments to shareholders could fall from 79 pence expected this year to £1 in two to three years. But these payments, she argues, must be seen in the context of the huge commitment the global energy giant has made to invest in the UK’s energy sector over the next 10 years, with a big slug of capital expenditure (75 per cent of the £20bn to £25bn of total expenditure) going towards green energy like offshore wind, hydrogen and carbon capture.

Noffke also said the windfall tax the government applies to the profits of energy companies operating in the UK is expected to generate £5billion to help households pay their energy bills.

Dan Lane, senior analyst at investment site Freetrade, is more cynical, particularly about BP. It argues that its decision to return a large portion of its second quarter profits (£6.9bn) to shareholders “runs counter to the company’s seemingly promising sustainability efforts”.

Wearing this on his chest, he admits the wider picture of UK dividends is “really quite rosy”, with all sectors of the UK stock market reporting increased income payments to shareholders in the second half of this year.

EXPERTS PLAN ADDITIONAL PAYMENTS

After 2020’s dividend drought, caused by the pandemic and lockdowns, experts now believe 2022 could be a bumper year for UK dividends. This is despite the Bank of England warning of an impending recession when it raised interest rates last Thursday to 1.75%, their highest level since the 2008 financial crisis.

Following BP’s 10% increase in its quarterly dividend, wealth management platform AJ Bell has predicted that the companies that make up the FTSE100 index will generate combined revenues of around $85 billion this year. pound sterling. If correct, it will take payments close to the record £85.2billion hit in 2018.

“The debate over the good and bad of BP windfall earnings will continue,” said AJ Bell Chief Investment Officer Russ Mould, “but from a narrow investment perspective, FTSE100 companies are on the right track. path to returning near record amounts of cash dividends to shareholders in 2022.’

AJ Bell’s analysis is in line with forecasts made last month by financial data specialist Link Group. He estimates that the income paid to shareholders by the UK stock market as a whole – and not just the 100 largest companies – will increase this year by 12.5% ​​to reach £ 86.8 billion.

Adding one-time special dividends – Glencore announced such a payment last week – the payouts will total £96.3bn. In 2020, the equivalent figure was £64.4 billion.

Translating these figures into the income investors in UK listed companies can expect from their holdings, we are talking about an annual dividend income of around 3.7%. This is the average of the companies that make up the FTSE100.

HOW TO GET A DIVIDEND INCOME TRANCHE IN THE UK

Investors can benefit from the higher dividends promised by some UK listed companies by buying their shares directly. It is best done through an investment platform run by AJ Bell, Hargreaves Lansdown and Interactive Investor.

Although the average dividend paid by companies listed on the FTSE100 is equivalent to 3.7% per year, some companies pay more.

For example, Legal & General’s stock dividend is around 6.9%, which is attractive for an income investor. Stocks like tobacco giant Imperial Brands and mining companies Anglo American and Rio Tinto offer even higher percentages at 7.6%, 7.4% and 11.9% respectively.

Of course, dividend increases aren’t guaranteed — and a full-scale recession could add to the dividend mood music.

As a result, Wealth thinks a more sensible approach for income-hungry investors is to buy an investment trust that invests in a basket of dividend-friendly UK stocks. Collectively they are known as UK Equity Income Trusts.

In addition to providing investors with essential diversification, these trusts can accumulate a portion of the income they receive from their investments in good times and then return it when times are tough (2020). This has allowed many of them to offer long periods of dividend growth to shareholders.

The table above gives details of eight UK equity income investment trusts which currently pay an annual income of at least four per cent. All have at least 10 years of annual dividend growth under their belts – some considerably more. All are exposed to BP or Shell – or both.

As with individual stocks, there can be no assurance that these trusts will continue to increase dividend payments or that the value of their shares will increase.

But as Annabel Brodie-Smith, director of the Association of Investment Companies, says: “Income is a priority for many investors, especially in today’s challenging market conditions, and investment funds are best placed to provide it.”

The last word goes to Laura Foll, manager of the Lowland investment fund (one of the eight).

She says: “We want certain companies to be able to increase their profits (and therefore their dividends) at a time when commodity prices are rising, such as Shell and BP.

“We want others to be able to increase their profits through a new blockbuster pharmaceutical product or growing infrastructure spending.

“It’s the combination of a growing and diverse income stream that helps ensure the sustainability of the trust’s dividends over time.”

For those looking to learn more about income investment trusts, visit theaic.co.uk. If you’re looking to build an income portfolio, AIC’s Income Finder Tool can help. Go to: theaic.co.uk/revenu-finder.

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Robert D. Coleman