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Income investing: why I think dividend stocks will rebound in 2021!

Kirsteen Mackay
·3-min read
Hand holding pound notes
Hand holding pound notes

Income investing has had a tough year in the UK on account of the pandemic. More than half of FTSE 100 constituents cut or cancelled their dividends, amounting to over £37bn in lost income. For many, such as Rolls-Royce, this was a necessary choice to stabilise the business and help see it through the tough year. For others, essentially the British banks, the move was forced as they were pressured into deferring their dividends by The Bank of England’s Prudential Regulation Authority. This watchdog has now lifted its restrictions, but will still keep a close eye on potential payouts in 2021.

Income investing revival

The cuts were an unwelcome shock during a raging pandemic. The reduction in payouts hit pensioners hard as investing for monthly income is a popular way for them to top up their State Pension. But income investing is moving back back into the spotlight as a potential recovery play in the coming year. Recently, several companies have reinstated their dividends and many more plan to in 2021.

Their share prices could continue to recover too. Britain’s share prices have faced the additional headwind of Brexit hanging over the UK economy for the past four years. That’s finally dealt with and UK companies can look to a new beginning. With the vaccine rollout also under way, confidence in UK financial markets can hopefully resume.

Dividends reinstated

Income investing is set to enjoy a rebound in 2021, with an expected 18% (£10.9bn) rise in dividend payments, according to AJ Bell. Several companies, including Smurfit Kappa and BAE Systems, have already reinstated their dividends. Others plan to as soon as it’s workable. I think Royal Dutch Shell, BP and AstraZeneca will continue to be big dividend stocks throughout the coming year. With e-commerce and distribution on the rise, I also like the look of packaging company Mondi and distributor Bunzl. While I’m not a fan of the banking sector, HSBC and Lloyds are also likely to reinstate decent dividend payouts.

Big tobacco firms Imperial Brands, and British American Tobacco are well known for their dividend payments. However, major pressure continues to weigh on this sector from activists and ‘ethical’ investors. Therefore, time will tell if their revenues can continue to support their high yields.

The power of dividends

Investing for income is a key strategy for many retail investors, and this is likely to continue. It’s great for topping up a paltry pension or to enhance household income. Many retail investors also like to reinvest their dividends to make use of compound interest in exponentially growing their wealth. I think this is a great long-term strategy for financial freedom.

Billionaire investor Warren Buffett also advocates investing in dividend-payers, as this is a great way for beginners to investing to grow their starting pots. And now’s a great time to start. While many US stocks have had a phenomenal year, UK stocks have not been so fortunate. Therefore, I think the FTSE 100 still contains high-quality companies at knock-down prices. And with decent dividends on offer, I think investors will find great value in UK stocks.

The post Income investing: why I think dividend stocks will rebound in 2021! appeared first on The Motley Fool UK.

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Kirsteen owns shares of BAE Systems, BP, and Royal Dutch Shell B. The Motley Fool UK has recommended HSBC Holdings, Imperial Brands, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020