As a long-term investor for decades, I’ve grown to rely on share dividends for a second income. Dividends are regular cash distributions paid by some companies to shareholders as a reward for being owners.
That said, the first problem with dividends is that not all listed companies pay them. And the second is that future dividends are not guaranteed, so they can be cut or cancelled at any time.
Falling share prices push up yields
Furthermore, as a veteran value investor, I’m always looking for solid businesses whose share prices have fallen back. That’s because when share prices go down, dividend yields go up — assuming future cash payments continue, that is.
For example, take these five FTSE 100 shares, all of which are trading at or (within a whisker of) their 52-week lows (displayed in order of market value).
Five FTSE fallers
| Company | Industry | Share price | Market value | Yearly dividend yield | 1-year change | 5-year change |
| Anglo American | Mining | 1,748.6p | £23.4bn | 5.8% | -51.3% | -5.8% |
| Glencore | Mining | 399.2p | £48.7bn | 8.7% | -31.0% | +34.2% |
| Diageo | Alcoholic drinks | 2,719p | £60.6bn | 2.9% | -26.6% | +0.1% |
| BP | Oil & gas | 446.3p | £76.4bn | 5.0% | -7.2% | -12.0% |
| Unilever | Consumer goods | 3,705.5p | £92.6bn | 4.1% | -9.7% | -6.8% |
These firms are Footsie powerhouses, with market caps ranging from nearly £25bn to over £90bn. For the record, my wife and I own all five of these FTSE 100 fallers in our family portfolio — all bought at prices above recent lows.
Owning these stocks has become rather uncomfortable lately, because their share prices keep on sliding. Indeed, all five shares have seen their values fall by almost 10% to over 50% over the past 12 months.
However, the figures in my table all exclude dividends — and each of these big businesses pays out billions of pounds a year in cash to their patient owners.
Thanks to these falling share prices, dividend yields from these sliding stocks now range from close to 3% to almost 9% a year. The average cash yield across all five shares comes to a healthy 5.3% a year to add to my second income. That’s well ahead of the wider FTSE 100’s dividend yield of 4% a year.
I’ll keep reinvesting my dividends
However, I have no current plans to spend these dividends as a second income. Instead, my wife and I will continue to reinvest this cash by buying yet more shares. Often, this is cheap and easy to do, via company DRIPs (dividend reinvestment plans).
Even better, reinvesting dividends while share prices are low should boost my future investment returns. At present, thousands of pounds of dividends flow into our portfolio each quarter, only to be immediately invested into yet more shares.
In summary, it feels quite painful at present to be invested in these five flagging stocks. But buying more shares at lower prices could help us to retire richer. Lastly, please don’t worry about us, because some of our other major shareholdings hit 52-week highs today!
