It was said of one tycoon (perhaps JP Getty) that he was so rich he “lived off the interest from his interest”. Very few of us can ever hope to become so vastly rich that we can live on, say, 1% of 1% of our wealth. Even so, generating a passive income is a goal for many investors. With savings interest rates at rock bottom, this is a tall order nowadays. Hence, I aim to generate additional income by collecting regular share dividends from UK-listed companies.
2020 was a grim year for share dividends
2019 was the best year for UK share dividends in history as these cash payouts hit a record high. Total dividends paid by London-listed stocks came to £110.5bn, up more than a tenth (10.7%) on 2018, according to Link Asset Services.
However, with company earnings devastated by Covid-19, UK share dividends collapsed in 2020. Indeed, according to A J Bell‘s excellent Dividend Tracker, 634 UK-listed companies cut, cancelled, suspended or delayed paying at least one dividend in the period from 9 January 2020 to 5 February 2021. Even worse, these 634 vanished share dividends amounted to a colossal £50.7bn in lost income for UK shareholders. With such a mammoth loss of cash payouts, it’s no wonder that the blue-chip FTSE 100 index lost a seventh (14.3%) of its value in 2020.
Dividends are expected to rebound in 2021
Good news: according to A J Bell’s quarterly Dividend Dashboard, share dividends should rebound this year. As Covid-19 vaccinations roll out and lockdown restrictions lift, higher consumer spending should stimulate economic growth. As a result, A J Bell expects total UK dividends to rise by £10.9bn to £70.8bn. That’s not guaranteed, of course. But already, 16 FTSE 100 companies have confirmed plans to restore dividends in 2021, boosting cash returns by almost £2.7bn.
It’s important to understand that UK share dividends are highly concentrated. According to A J Bell, 10 FTSE 100 stocks accounted for more than half (54%) of forecast dividends for 2020. In addition, the top 20 may account for three-quarters (75%) of total dividends paid in 2020. Furthermore, 15 FTSE 100 companies pay yearly dividends exceeding £1bn. The top five payers all return between £4bn and £5bn in cash to their shareholders each year.
Of course, if Covid-19 keeps mutating and more new variants emerge, then all bets are off. In this scenario, share dividends could even fall further this year. Yikes!
I want my share of this £70.8bn cash flood
As I explained two weeks ago, my family is in line for a windfall of around £300,000. My wife and I have decided to earmark this sum for generating passive income. By investing this lump sum into stocks and shares, we aim to pocket 4% a year from share dividends. This comes to an extra £12k a year (£1,000 a month) in cash before tax.
We won’t take excessive risks with this sum, so we aim to invest it in what I call ‘BBC businesses’: Big, Beautiful and Cautious. Thus, the bulk of this sum will be invested into mega-cap companies: the biggest beasts of the Footsie. There are 13 FTSE 100 members with market values above £40bn. What’s more, the total market cap of these 13 giants is almost £837bn. In my next article, I will unveil these 13 giants and reveal which quality stocks I intend to buy for bumper cash dividends…
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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.