BP and Royal Dutch Shell have been hugely-disappointing UK dividend shares of late. Both were forced to cut dividends in 2020 as the coronavirus crisis hit oil demand and sent crude prices crashing. Shell’s decision to slash shareholder payouts was the first time it’d embarked on such action since World War 2.
Could 2021 prompt a sharp dividend recovery at these UK shares, however? City analysts expect earnings to rise strongly at both this year. And this prompts predictions that annual dividends will improve from 2020 levels too. Consequently BP and Shell sport enormous forward yields of 6.3% and 4.1% respectively.
High-risk FTSE 100 stocks?
Investor demand for these FTSE 100 oilies has perked up in recent sessions. They were just trading at their most expensive since last summer as Brent prices rose to 11-month highs around $57 per barrel.
I for one won’t be buying these UK shares for my own Stocks and Shares ISA, however. It’s not just that rising Covid-19 cases over the world, and the onset of fresh lockdowns and travel bans, casts a cloud over their earnings and dividends pictures in 2021. It’s that income flows from BP and Shell might disappoint long after the coronavirus crisis has passed.
As the boffins over at Hargreaves Lansdown have noted: “Pandemic or not, the future of the energy sector is in question and major players are increasing their focus on cleaner energy. While that could offer long-term stability, it’s going to take a lot of investment and means they’ll have less cash to pay out in dividends”.
With other energy producers remaining “all-in” on traditional oil, the investment giant reckons that “dividends in the oil and gas sector are unlikely to return to their former highs any time soon”. As well as subdued demand, profits at BP and Shell are likely to be hit by the supply glut hitting the oil market.
Two UK shares I’d rather buy!
Why take a chance with these FTSE 100 oilies, then? There are plenty of UK shares on the Footsie alone that are in better shape to pay big dividends in the near term and beyond.
Take 6%-yielding GlaxoSmithKline, for example. The stable nature of drugs demand means that this FTSE 100 stock will have the clout to keep paying big dividends to its shareholders. The pharma giant’s colossal drugs pipeline, allied with surging healthcare spending in emerging markets, should give it the strength to keep shelling out huge rewards to its shareholders too.
Admiral Group’s another top dividend stock I’d rather buy for my ISA. Its starring role in the defensive car and household insurance markets will provide the strength for it to keep paying big dividends in 2021 despite the tough economic outlook. And I’m expecting the FTSE 100 business to deliver terrific long-term returns as its international businesses gain momentum and it expands its product ranges. This UK share sports a near-5% dividend yield for 2021 right now.
The post UK dividend shares: Are these 6% FTSE 100 dividends top buys or investment traps? appeared first on The Motley Fool UK.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Admiral Group, GlaxoSmithKline, and Hargreaves Lansdown. 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 2021