Stockopedia: 10 FTSE 350 stocks where dividends are bouncing back

Covid-19 led to many companies suspending the payments, but many defensive stocks are staging a comeback.

One of the painful consequences of the Covid-19 crisis on the stock market this year has been the widespread cancellation of dividend payouts. 

A natural first move by companies faced with uncertainty is to conserve cash. And for income investors, dividends are usually the first cost to be cut.

The impact of coronavirus in the UK first emerged in Q1, so the impact on dividends was not really known until the half-year. But the writing was on the wall: reports of dividend cuts and cancellations filled the RNS newswires for weeks during the spring.

By mid-summer, analysts at Link Asset Services started to put numbers on the problem, and it looked bleak. Three quarters of the companies due to pay dividends in the second quarter either cut or cancelled them altogether. Year on year payouts more than halved (-57.2%) in that time to £16 billion.

Unsurprisingly, the latest figures for Q3 tell a similarly distressing tale. Year on year payouts fell by 49% between July and September to £18 billion - the worst Q3 performance since 2010. 

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According to Link, £14.5 billion was slashed from the overall total in Q3, and banks accounted for two-fifths of it. Bank dividends have been on hold since late March, when the Bank of England stepped in to maintain order. A review of that policy is not expected until Q4. 

Elsewhere, oil and mining stocks (with the notable exception of gold stocks) were also responsible for much of the reduction. On a sector basis, the hardest hit areas of the market have been travel and retail, where payouts fell by 96% on the same period last year. 

Signs of optimism

But there is hope on the horizon. Defensive stocks in food retail and consumer staples delivered modest increases in their dividends in Q3. In turn, some stocks have even started to reinstate their dividends, and in some cases they’re making up previous shortfalls - including shares like BAE Systems and IMI.

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It’s not unreasonable to think that analysts are now likely to be getting better clarity from management on future dividend payouts. 

So there could be reasons to take note of some of the big forecast upgrades to see where the early dividend recoveries can be found. This screen uses some simple dividend screening rules: looking for strong growth forecasts, above-average yields and solid dividend cover across the FTSE 350: 

An improving outlook?

There is a distinctly defensive feel to these top results, with consumer defensives like J Sainsbury (LSE:SBRY) and WM Morrison Supermarkets (LSE:MRW) rubbing shoulders with industrials like Babcock (LSE:BAB) and QinetiQ (LSE:QQ.), miners like Rio Tinto (LSE:RIO), BHP (LSE:BHP) and Polymetal (LSE:POLY) and a number of financials, ranging from the insurance giant RSA through to online trading platforms like Plus500 (LSE:PLUS) and CMC Markets (LSE:CMCX). 

According to Link, the final dividend total for 2020 is likely to come in at around £60 billion, which would be a fall of 39% on 2019. But it is promising that there are signs of more certainty surrounding dividends, which will help investors to calibrate their holdings to those stocks and sectors that are not being hit as hard as others by Covid-19.

In most cases, strong dividend growth forecasts are being seen in stocks that had previously cut their payouts but now look set to reinstate them. All eyes will be on the final months of the year to see if these early signs become a solid trend.

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