So the FTSE 100 has only gained 7% over the past five years? You might think that’s made shares a lousy investment. But you’d be wrong, because you’d be reckoning without dividends — and I contend that we’re in one of the best periods for income seekers that we’ve had in years.
The FTSE itself is paying average dividends of around 3.5% per year right now, which would add 17.5% in extra returns over five years, and more if you reinvested the cash — your dividend income alone would beat anything you can get from cash savings hands down.
And what’s more, that 3.5% average includes all the growth stocks that aren’t handing out much cash at all, so you should be able to bag a far better income by concentrating on the big dividend payers.
Five years
Look at National Grid, a utility firm renowned for its dividends. Had you bought some shares five years ago, you’d have paid around 598p apiece. Since then, and assuming forecasts for the year to March 2016 are accurate, you’d have earned 209p per share in dividends — that’s a return of 35% over five years, even without reinvesting the dividends. And the bonus? the share price is up 61% too — you’d have just about doubled your money in total!
How about an insurer like Legal & General, which is expected to pay a dividend yielding 5.5% for the year just ended in December 2015, with forecasts taking that up to 6.2% by 2017. How can you possibly consider a bank savings account offering around 1.5% per year when you can have that? Scared of share price falls? Don’t be — Legal & General shares have more than doubled in price in five years, yet are still only on a modest P/E rating of around 12.
There are plenty of others too. Lloyds Banking Group is on a prospective dividend yield of 5.9% this year, the forecast for pharmaceuticals giant GlaxoSmithKline is the same, housebuilder Taylor Wimpey has a 6.2% yield on the cards, and there’s 6% pencilled in for high street retailer Next.
And you know what? If you invested in all six of these companies, you’d have a pretty nicely diversified start to what I see as a decent income portfolio.
Reinvest?
Now, there’s one key part of a long-term dividend strategy that so far I’ve only alluded to, and that’s reinvesting your annual dividends (assuming you haven’t yet reached the stage when you need to draw them down for living expenses).
Remember the near-doubling of your money you’d have had from National Grid over five years? You’d actually have made a 96% profit from share price rises plus dividend cash. But what if each year you’d reinvested the cash in buying new shares? Well, you’d have ended the five-year period 108% ahead. For every £1,000 invested in National Grid five years ago, you’d have made a profit of £961 taking the cash, or £1,080 by reinvesting it.
But that would only be the start, as you’d be entering your next five years with 206 shares for every initial £1,000, instead of the 175 you’d have had you not reinvested. And looking back further to ten years, an initial £1,000 would have turned into £2,660 over a decade if you spent your dividends — but £3,275 if you reinvested the cash!
They’re cheap now
With so many high dividend yields available today, I can only conclude that income-paying shares are cheap now — and we should make the most of them while we can.
