2020 has proved to be a colossal challenge for dividend investors. Hundreds of UK shares have cut, postponed, and/or cancelled shareholder payouts in response to the Covid-19 crisis.
Investing conditions could remain difficult well into next year too, as coronavirus cases keep rising and mass lockdowns re-emerge.
Recent data shows the rate of dividend declines has eased in recent months. But UK share investors aren’t out of the woods yet. Link Group expects “further sharp declines” in this quarter and the first three months of 2021. Its hopes of a bounce-back beginning next April could also come under threat if the global economy fails to rebound.
Treading carefully with UK shares
We at The Motley Fool believe the 2020 stock market crash provides a brilliant investing opportunity. It allows long-term UK share investors like me to buy top-class quality stocks that plummeted in value during the melee. They can then make a fortune in the eventual economic recovery. They’ll rise in value as corporate profits improve and market confidence rebounds.
But clearly dividend investors need to be extremely careful. The global economy hasn’t faced a challenge like this for generations and even the biggest British companies are scrambling to conserve cash. More than half of FTSE 100 shares reduced or stopped paying dividends following the Covid-19 outbreak. Those looking to keep enjoying healthy income flows over the next couple of years could still end up disappointed.
Dividend yields of 9% and 11%
The following UK shares have caught my eye on account of their gigantic near-term yields. But are they brilliant buys or dangerous investment traps? Let’s take a look:
- BP has long been a favoured stock among dividend-hungry UK share investors. Its exceptional cash flows have meant shareholder payouts have historically bounded past the FTSE 100. I fear, though, the tide has finally turned after the oil giant cut dividends in August. And I believe it’ll struggle to reclaim its former glories. It’s not just the threat of growing market oversupply in the short-to-medium term that BP faces. I believe the transition to green energy will throw up additional, and colossal, problems for the Footsie firm. This is why BP’s 11% dividend yield for 2020 doesn’t appeal to me.
- Trans-Siberian Gold looks like a rock-solid dividend share for the next few years. And the best thing is that today it carries a dividend yield north of 9% for 2020. I’m confident that gold prices should keep rising during the medium term at least. I also like Trans-Siberian because of its low cost base, its robust track record of production, and its high ore grades (these came in at 7.4 grams per tonne in the third quarter). Finally, at current prices, this gold-producing UK share trades on a bargain-basement forward P/E ratio of 7 times.
