Banking giants finally get the green light to pay dividends again

Once a staple for ordinary investors’ portfolios, the FTSE’s big banks don’t get much love these days.

Even before Covid, banking shares were still struggling with the lingering effects of the 2008 financial crash, along with Brexit uncertainty. As a result, banks emerged as one of the worst performing sectors of the FTSE 100 over the past decade.

But could their fortunes be about to change? Better-than- expected economic data is finally starting to breathe signs of life into the big banks.

Better than expected economic data is starting to breathe signs of life into big banks, with Lloyds and NatWest up 30 per cent and 28 per cent since January, and Barclays up 15 per cent

Lloyds and NatWest are up 27 per cent and 21 per cent since January, with Barclays up 13 per cent.

And news that the banks will resume paying dividends will come as a welcome relief to those seeking a regular income.

So could this unloved sector boost your portfolio? Or should investors be wary?

Reliability

With a value of more than £200 billion, banks are a big part of the FTSE 100 — accounting for more than 10 per cent of total market cap.

Asian giant HSBC leads the pack, with domestic-focused Lloyds not far behind.

Shareholders would typically receive yields of around 5 per cent, with banks sometimes accounting for 25 per cent of all FTSE dividends.

In recent years, banks have struggled more with a difficult economic climate, as low interest rates have made lending less profitable. 

When Covid struck, bank shares were hit hard, with HSBC and Barclays both losing 50 per cent of their value in six months.

While most other sectors have recovered their losses (bringing the FTSE All Share within 8 per cent of its pre-Covid high), banks have lagged behind.

Their dividends were also slashed when the Bank of England stepped in to place a temporary restriction on payouts.

The idea was to ensure banks would have the capital needed to weather the Covid crisis.

Last week, Threadneedle Street confirmed full dividends can resume. Healthy balance sheets mean the big five (HSBC, NatWest, Lloyds, Standard Chartered and Barclays) should pay out more than 3 per cent this year. 

Those payments are then expected to rise in coming years, to as much as 6.7 per cent for HSBC and 5.3 per cent for Barclays in 2023.

Case against

As you might expect, bank shares certainly aren’t without risk. While share prices have responded well to positive economic data (in particular on the Covid recovery), not all signs are so good.

Ultra-low interest rates show no signs of disappearing. Like many other parts of the stock markets, banks also remain sensitive to signs of resurgent inflation — particularly in the U.S. And while mortgage lending has been healthy, the housing market still faces uncertainty.

On top of that, High Street banks are being squeezed by new competitors, including ‘fintech’ companies.

Just last week, digital banking company Revolut became Britain’s highest-valued private tech company — valued at £24 billion.

Having begun as a plucky start-up in 2015, it is applying for a full banking licence. Its backers will be hoping Revolut can secure a long-term share of the banking market — at the expense of the more established players.

How to invest

With those factors considered, banking shares still look undervalued. But, as with any investment decision, buyers should be sure to do their homework first.

And income investors are not the only sector paying dividends. The FTSE 100 should release £76.9 billion in dividends this year, with Rio Tinto, British American Tobacco and investors M&G all paying upwards of 7 per cent.

As ever, it’s also worth looking at investment funds. These allow you to pursue a particular investment strategy without having to do your own stock-picking.

Standard Chartered, Lloyds and Barclays all feature in Schroders’s popular Recovery fund, which looks for underpriced assets from across the FTSE. 

A £10,000 sum invested five years ago would now be worth £12,400.

Income funds, meanwhile, focus on dividend-paying assets and passing these profits on.

River & Mercantile’s UK Recovery fund backs Barclays, Lloyds and HSBC, plus Shell and BP. A £10,000 investment five years ago would have grown to £15,900.

If dividend forecasts prove to be correct, it could emerge as a strong portfolio pick.

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This post first appeared on Dailymail.co.uk