The top five shares and five funds offering a decent dividend

Mining giant BHP’s decision to slash its dividend by £362 million today takes to £13.8 billion the amount of money lopped off payments to investors by FTSE-100 companies during the Covid crisis so far.

All the companies cut their half-year payments to hold onto cash during this period of unprecedented uncertainty, but each reduction will have caused anguish to thousands of investors who rely on dividend income to fund their living.

BHP’s cut of £371 million makes it the latest in long run of companies playing Scrooge at a time savers have been left high and dry by near-zero interest rates on practically all other assets.

However, some companies have been able to retain their divi payments. Housebuilder Persimmon, for example, kept its payout going today.

According to AJ Bell research, although £13.8 billion of divis have been cancelled, cut or deferred by 31 companies, a further 26 firms have maintained or even increased their payments, totalling £9.2 billion. Four have restored payments worth a total of £1.5 billion so far.

Those retaining their payouts include BHP rival Rio Tinto, which paid £1.51 billion after beating market expectations with its profits.

BAT paid £1.21 billion, Diageo £1.1 billion and GlaxoSmithKline £953 million.

In further good news, many of these companies still have lowly share prices relative to the value of their expected dividends. GlaxoSmithKline, for example, is yielding 5.2%, while Rio Tinto yields 6.2%.

It should be noted that those yields are based on the expected future dividend payments which, in these uncertain times, may prove wrong.

And remember, the higher the yield, the greater the chance of a nasty cut in the pipeline.

But here are the biggest 10 payers so far during the half-year earnings season.

Top 10 retained dividends and yields

Rio Tinto: half-year payout £1.51 billion, indicative yield 6.2%

BAT: £1.21 billion, 8.2%

Diageo: £1.09 billion, 2.6%

GlaxoSmithKline: £953 million, 5.2%

AstraZeneca: £913 million, 2.5%

Unilever: £860 million, 3.3%

Reckitt Benckiser: £519 million, 2.3%

Legal & General: £294 million, 7.8%

RELX, £263 million, 2.6%

Phoenix, £234 million, 6.6%

Source: AJBell, Bloomberg

Clearly, from that lot, the standout winner is BAT, with a yield of 8.2% and the second highest payer in pounds and pence in the market.

Should you buy the shares? If you don’t mind people dying to fund your income, then probably, yes. Tobacco stocks are relatively cheap because they are catering for a slowly dwindling customer base and fall foul of some investors’ ethical standards.

BAT’s shares have fallen sharply over the past couple of years as it has failed to pay off debt as quickly as hoped since buying Reynolds in the US.

However, its leverage is still sharply down, and it pays off enough cash for it not to threaten the dividend, all things being equal.

Personally, though, I still prefer insurance to cancer sticks (although as actuaries will tell you, the prospects of one can depend on use of the other).

L&G and Phoenix’s yields look tempting.

They are high because their sector is unfashionable at a time when investment returns on their funds are weak due to low interest rates.

Some analysts fear L&G will struggle to keep raising its divi (which has already increased 7% over the past three years) due to sliding profits.

Fans counter that new business in pension transfers and investments in new assets such as housing and urban regeneration will bring in the cash.

Phoenix owns old books of life insurance business. As the policies mature, the cash that generates is paid out as dividends. The nature of its work means you can see for years ahead what shape the business will be in, and how much it will be able to return. The guidance is steady, reliable growth.

Rio Tinto's recent dividend payout looked especially healthy after BHP's cut today, and Glencore's previous reduction.

Clearly, the shares look cheap compared with the divi because markets suspect it may not be able to pay up next time.

Much depends on the iron ore price - itself dependent on the global economy. But Rio has a decent track record of delivering on the divi and has plenty of cash to cover its current payments. At these levels, it looks worth a bet.

The other standout yielder is GSK, which also strikes me as a decent bargain for 5.2%.

Like its rival AstraZeneca, for years it was struggling with a dwindling pipeline of potential blockbuster medicines and ever rising research and development costs.

Both have launched multi-year restructuring projects to focus down on fewer, more promising medicines.

AZ began restructuring first, and has pulled out of the other side earlier, hence its lower yield. But GSK is getting there, albeit after being waylaid by Covid restricting patients’ visits to doctors for vaccines.

As the dividend culling trend has impacted individual stocks, it has also hit the performances of funds, particularly (obviously) those chasing income.

Investment advisory group Sanlam just published its review of income funds.

It found those backing more FTSE-100 size companies fared better than those backing smaller businesses. During the crisis, big was better when it came to gaining access to capital.

Bigger companies also had wider spread risks, and so tended to be insulated more than smaller ones from the lockdown in the UK.

Following that thought, Sanlam advises investors to seek funds sourced from outside the FTSE-100, too. There seems little sense limiting one’s potential hunt to a “shrinking pool of heaviweights”, they advised.

Its picks go into what it calls the White List of top income funds with proven track records of strong income distribution, volatility and overall performance over five years.

The winner came out as the Liontrust Income Fund, run by Robin Geffen, which was praised for having fared well in the recent volatile period as well as over the preceding few years. According to Sanlam, £100 of investment would have returned £25.30 since 2015.

The Santander Enhanced Income Fund came second, with manager Graham Ashby and Duncan Green beating many rivals thanks to a good dividend. It would have earned you £30.70 over five years.

The LF Miton UK MultiCap Income Fund came third thanks to a good recent performance although it dropped off the White List in the previous review. The five year income on £100 was £19.40.

BlackRock’s UK Income and ES River & Mercantile UK Equity Income came in fourth and fifth with five year income of £23.60 and £23.10 on £100 respectively.

Those that fell out of the White List were Lazard MultiCap UK Income Fund, the Royal London Equity Income Fund and the Allianz UK Equity Income Fund.