Getting paid money for holding a stock is a good way for investors to make some passive income. As a result, FTSE 100 dividend stocks have always been a popular choice of investment. However, with the economic situation at the moment and other factors, I feel there’s a lot more interest in dividend stocks than there was during the pandemic. Here’s why.
The pressure of inflation
UK inflation is running at 10.1%. It has been above 10% since August last year. It erodes the value of cash in the bank, forcing people to try and find ways to offset this impact. One way is by investing in a dividend stock. From using the dividend per share and the current share price, an investor can calculate a dividend yield as a percentage.
For example, the M&G dividend yield is 9.6%. There are no guarantees that future dividends will stay the same. But let’s assume that they do for M&G over the next year. In that scenario, the investor would make 9.6%, but would have to subtract the rate of inflation to reach a real net return.
Even though this might be positive or negative, it certainly helps to offset some of the inflationary pressure on holding cash. That’s why a lot of people are talking about it right now.
Generous yields on offer
This leads on to the key reason for heightened interest — some of the yields that investors can enjoy. The base interest rate is 4.25%, so it doesn’t really make sense to invest in a stock with a lower yield than this.
But what about Legal & General, with the insurance company having a current yield (8.5%) of double the base interest rate? Sure, it’s a higher risk as the capital invested could lose value if the share price falls. But I feel that the boosted return compensates investors fairly for the added risk of buying the stock.
Naturally, not all stocks make sense from this perspective. Yet that’s why a lot of chatter and research goes on, to help sift through companies to find the best dividend stocks.
Investing for the long term
Finally, shrewd people know how to benefit from compounding returns. A dividend paid today is great, but reinvesting that dividend and future ones can help to build a much larger income further down the line.
I feel a lot more people are now focused on planning financially for the future due to the difficult economic situation we’ve been in recently. The concept of building up to having a steady stream of income is becoming more and more appealing.
Don’t get me wrong, it isn’t easy. Dividends fluctuate based on company performance. Unlike a cash savings account, the money invested is also at risk if the share price underperforms. Yet the upside potential is there, offering attractive returns.
