Dividends stocks are bouncing back strongly following the washout of 2020. Profits are recovering following the end to long and strict Covid-19 lockdowns that decimated revenues across UK plc. Balance sheets are also being built back up as well, giving companies the financial firepower and the confidence to lift dividends again.
Could this be a great time for me to go shopping for UK dividend shares? A new report from Henderson International Income Trust (HINT) certainly suggests that British income stocks are becoming increasingly robust places for investors like me to park their cash.
Dividend cover bounces back!
According to the trust, global dividend cover fell to 11-year lows in 2020 as the pandemic obliterated corporate earnings. This dropped to 1.8 times from 2.2 times the previous year, below the widely regarded security benchmark of 2 times and above.
However, HINT reckons cover will recover strongly to 2.1 times projected earnings in 2021. This perky projection reflects the expectation that profits will grow faster than dividends. Furthermore, this strong rebound is expected to continue into next year. Dividend cover of 2.4 times is predicted for 2022, the highest rate since 2013.
2020 wasn’t a good year for dividend investors, clearly. Total payouts to UK investors plummeted 44% year-on-year last year, Link Group says. But pleasingly, HINT also thinks that the reductions of last year have reduced the number of so-called yield traps by a third. The trust classifies these traps as “companies with a superficially attractive yield but which either cannot grow their dividends or may have to cut”.
2 dividend stocks I’d buy right now
There’s no such thing as a completely safe dividend stock, of course. Even some of the most reliable income shares, from power grid operator National Grid and support services provider Bunzl to oil giant Royal Dutch Shell, have in recent years been forced to reduce dividends for one reason or another.
The fragile state of the economic recovery means that investors like me need to remain on guard too. Fresh waves of pressure could hit company balance sheets and profits levels again, and dividends could fall once more. The threat of rising inflation and resurgent Covid-19 infection rates are hazards share pickers need to take seriously.
I don’t think I should pause to wait and see what happens, however. As Henderson International Income Trust says, dividend cover looks set to recover strongly on a broad basis over the next year. And with some decent research it’s possible to dig out some rock-solid dividend payers. There’s plenty of reason why I for one remain confident enough to keep buying dividend stocks right now.
For example, I’m thinking of buying 4.1%-yielding United Utilities today. I think the water supplier’s ultra-defensive operations make it highly attractive for income chasers. That’s even though the problem of high infrastructure investment costs can take a bite out of profits. Furthermore, I reckon Vodafone’s excellent cash generation and 7% dividend yields makes it a great stock to buy right now. That’s in spite of the intensifying competitive pressures it faces across the globe.
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Royston Wild owns shares of Bunzl. The Motley Fool UK has recommended Bunzl. 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.
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