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

Turning the tide: Dividends are the investor’s friend

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

Although dividends are not loved by everyone (especially comfortably off socialist politicians) and can court controversy as happened last week with BP, they are an essential component of most people’s financial armoury. 

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

In recent days, two of the UK stock market’s biggest companies – energy giant BP and mining behemoth Glencore – have declared dividends that will bring smiles to the faces of many shareholders. 

Further good news is expected this week when insurer Legal & General announces its financial results for the first half of this year. Analysts expect it to increase dividends by as much as eight per cent. 

‘It is good to see the likes of BP and Shell raising their dividend payouts once again,’ says Simon Gergel, head of UK equities at asset manager Allianz Global Investors. 

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

Gergel runs the £773million investment trust Merchants that invests in major UK companies, delivering a high and rising income – together with capital growth – for shareholders. 

Like most managers that trawl the UK market for income-friendly stocks, he refuses to get caught up in the debate over whether BP and Shell should be making money hand over fist – and paying dividends to shareholders – while households face record energy bills. Both BP and Shell are top 10 holdings in the trust. 

‘We buy companies where we believe we can make a good total return,’ says Gergel. ‘This focus allowed us to buy and hold big energy companies in 2020 after they cut dividends – and at a time when their shares were cheap. This has helped drive the overall performance of the trust as these shares have recovered and started paying dividends again.’ 

Thomas Moore of investment house Abrdn and Sue Noffke of rival Schroders are more forthcoming.

Moore, senior investment director, describes Shell and BP as having ‘compelling investment attractions’. He says the ‘prodigious’ amounts of cash they are generating 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 flows tend to be rewarded with rising share prices. 

In terms of ESG (environmental, social and governance) issues, Moore believes both companies are stepping up to the mark. He adds: ‘They are playing an important role in reducing Europe’s dependence on Russian oil, both through oil and gas supply – and their investment in hydrogen and renewables.’ 

Noffke manages the £206million Schroder Income Growth Fund. Its biggest holding – representing nine per cent of assets – is Shell. 

She says Shell’s dividend payments to shareholders could rise from an expected 79pence this year to £1 in two to three years’ time. But these payments, she argues, should 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 £20billion to £25billion total spend) earmarked for green energy such as offshore wind, hydrogen and carbon capture. 

Noffke also say the windfall tax the Government is applying to the profits of energy companies operating in the UK should generate £5billion to help support households with their energy bills. 

Dan Lane, senior analyst at investment website Freetrade, is more cynical, especially of BP. He argues its decision to hand over a big slice of its second quarter profits (£6.9billion) to shareholders ‘flies in the face of the firm’s seemingly promising sustainability efforts’. 

Having got that off his chest, he concedes that the broader UK dividend picture is ‘really quite rosy’ with all sectors of the UK stock market reporting an uplift in income payments to shareholders in the second half of this year.

EXPERTS FORECAST BUMPER PAYOUTS 

After the dividend drought of 2020, brought about by the pandemic and lockdowns, experts now believe 2022 could a bumper year for UK dividends. This is despite the fact that the Bank of England warned of a looming recession when it put up interest rates last Thursday to 1.75 per cent, their highest level since the 2008 financial crisis.

In the wake of BP’s 10 per cent increase in its quarterly dividend, wealth platform AJ Bell predicted that the companies which form the FTSE100 Index will deliver combined income payouts this year in the order of £85billion. If correct, it will take payments close to the record £85.2billion achieved back in 2018. 

‘The debate over the rights and wrongs of BP’s bumper profits will run and run,’ opines Russ Mould, AJ Bell’s investment director, ‘but from the narrow perspective of investment, FTSE100 companies are on track to return near record amounts of dividend cash to shareholders in 2022.’ 

AJ Bell’s analysis is in line with forecasts made last month by financial data specialist Link Group. It believes that income paid to shareholders by the UK stock market as a whole – not just the biggest 100 companies – will jump this year by 12.5 per cent to £86.8billion. 

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

Translating these numbers into the income that investors in UK listed companies can expect from their shareholdings, we are talking of annual dividend income in the region of 3.7 per cent. This is the average for those companies that make up the FTSE100.

HOW TO GET A SLICE OF UK DIVIDEND INCOME 

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

Although the average dividend being paid by FTSE100-listed companies is equivalent to 3.7 per cent per annum, some companies are paying more.

For example, the dividend from shares in Legal & General is around 6.9 per cent – attractive for an income investor. Shares in the likes of tobacco giant Imperial Brands and mining companies Anglo American and Rio Tinto are offering even higher percentages at 7.6 per cent, 7.4 per cent and 11.9 per cent respectively. 

Of course, dividend increases are not guaranteed – and a full-blown recession could change the dividend mood music for the worse. 

As a result, Wealth believes a more sensible approach for income-hungry investors is to buy an investment trust that invests in a basket of dividend-friendly UK shares. Collectively, they are known as UK equity income trusts. 

As well as providing investors with all-important diversification, these trusts can squirrel away some of the income they collect from their investments in the good times – and then pay it out when times are tough (2020). This has enabled many of them to deliver long periods of dividend growth for shareholders. 

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

As with individual shares, there is no guarantee these trusts will keep growing dividend payments – or that their shares will rise in value. 

But as Annabel Brodie-Smith, director of the Association of Investment Companies, says: ‘Income is a high priority for many investors, especially in the current challenging market conditions, and investment trusts are best suited to delivering it.’ 

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

She says: ‘We want some companies to be able to grow earnings (and therefore dividends) at a time of rising commodity prices such as Shell and BP. 

‘We want others to be able to grow earnings because of a blockbuster new pharmaceutical product or growing infrastructure spending. 

‘It is the combination of a growing and diverse income stream that helps to ensure the sustainability of trust dividends over time.’ 

For those looking to find out more about income investment trusts visit theaic.co.uk. If you are looking to build an income portfolio, the AIC’s income finder can help. Go to: theaic.co.uk/income-finder.