Dividend payments for FTSE 100 companies are forecast to fall 24% - or £18 billion - in 2020, leaving the total at its lowest level since 2012, according AJ Bell’s latest Dividend Dashboard report.
This means the FTSE 100 is expected to yield 3.5% for 2020, rising to 4.2% in 2021.
The report revealed that dividend forecasts for the year have fallen by 10% since June to £56.5 billion, largely the result of BP's decision to slash its second-quarter dividend in half.
Dividend payments are now expected to fall for two consecutive years before starting to recover in 2021.
Russ Mould, investment director at AJ Bell, said: "In total, 35 members of the index have cut, deferred or cancelled payments for 2020 thanks to the Covid-19 viral outbreak and subsequent recession, while 28 have maintained or increased one for fiscal 2020.
"Just four firms are expected to be responsible for the bulk of the 24%, or £18 billion, of dividend cuts across the index."
Despite further dividend payment reduction, cover remains at a similar level to the last quarter. The aggregate earnings cover ratio for the FTSE 100 stands at just 1.42x, which equates to a 70% payout ratio.
Mould said analysts and shareholders are pinning their hopes on a pick-up in economic activity and therefore profits and cash flow in the second half of 2020 and beyond.
"More encouragingly, analysts seem to think that boardrooms will not look to splash the cash too quickly if the good times do start to roll, as earnings are forecast to grow faster than dividends in 2021," he said.
"That would allow earnings cover to start to move back towards the 2.00-times threshold that provides a safety buffer in the event of the unexpected - such as a double-dip recession."
Following cuts or cancellations from Shell, HSBC and BP earlier this year, British American Tobacco (BAT) is now forecast to be the biggest dividend payer in the FTSE 100 in 2020, paying out £4.9 billion.
The report pointed out that not all investors would welcome this, especially those who feel that tobacco does not pass their socially responsible investing (SRI) screen tests.
"However, others will welcome how BAT's chief executive Jack Bowles continues to stick to his target of a 65% dividend payout ratio," Mould said. "The company's interim results offer support to earnings forecasts too, in the absence of changes to sales and earnings guidance for both 2020 and the medium-term."
Even after cutting dividends in 2020 and 2018, BP and Vodafone still offer yields of more than 8%, while Imperial Brands and Aviva, which also have dividends, are both forecast to provide a yield of more than 10%.
"Yet that 10% forecast yield may make investors nervous, even though chief executive Amanda Blanc has a clear mandate to shake up the life insurer after her appointment to replace Maurice Tulloch in July," Mould said.
"Other double-digit forecast dividend yields that looked good on paper but too much to sustain in reality include those once offered by Centrica, Vodafone, Taylor Wimpey, Persimmon and Evraz where the hoped-for dividends ultimately did not materialise. If Aviva can deliver, then the shares could prove to be very cheap indeed."
A 47% recovery in profits is anticipated by analysts for 2021 in the wake of 2020's expected 40% plunge. However, Mould warned that a renewed drop in economic activity could still pose a big risk to dividend forecasts.
"Two-thirds of 2021's expected £52 billion increase in pre-tax income is forecast to come from just three sectors - oils, financials and miners - all of whom could do with an economic tailwind if they are to live up to such expectations, even allowing for the cost-cutting plans," he said.
"If the economy offers little or no assistance - or even hinders - then these earnings forecasts, and by extension, dividend payment estimates could find themselves exposed to the downside."
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