Here’s why the FTSE 100 is still my top choice for dividend income

If we invest for long-term dividend income, we surely want to buy stocks on markets with lower values and higher yields, don’t we?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

One English pound placed on a graph to represent an economic down turn

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The UK stock market might not be the best bet for finding high-flying growth stocks. But I think it could be perfect for those of us seeking dividend income.

I was considering this after reading some recent thoughts from Shell (LSE: SHEL) CEO Wael Sawan.

Speaking to Bloomberg, he was despairing of Shell’s low valution on the FTSE 100. He even speculated about dropping the firm’s London listing, in favour of a US market. And I can understand the feeling.

Oil stock valuations

Even after a recent price boost, the forecast Shell price-to-earnings (P/E) ratio is still down around nine. By contrast, the US-listed Exxon Mobil commands a P/E of 13.5, and that’s signficantly higher.

But what’s actually wrong with a low P/E?

Well, for a CEO, it might suggest weakness. And a low valuation can leave a company vulnerable to takeover attempts. Not that I expect anyone to launch a bid for the £187bn Shell, mind.

What would Warren Buffett say?

But why does it matter to shareholders, especially when it’s a cash-generative stock paying good dividends? For that, I’ll hark back to what billionaire investor Warren Buffett once asked about beef.

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

The answer was obvious to him, and it seems obvious to me.

Shell dividends

If I wanted to keep buying Shell shares for dividend income, why would I want the price to rise? So that I’d have to pay more and get a lower yield when I bought more shares? That wouldn’t make any sense at all.

Speaking of yields, Exxon Mobil shareholders look set to pocket around 3.1% for the current year, with the Shell dividend yield up at 3.8%.

Shell’s might not be the biggest yield on the FTSE 100. But that extra 0.7% a year could make quite a difference, reinvested and compounded over the next couple of decades.

Index valuations

To see the difference more clearly, what about the index itself, compared to the S&P 500?

Valuation measures for the two indexes vary depending on who we listen to. But it looks like the FTSE 100 is on a P/E of about 11 now, with the S&P 500 up around 25.

The US index has an overall dividend yield of around 1.4%, against the Footsie’s 3.7%. That’s just one snapshot, and over the longer term I’d expect the two indexes to be a bit closer together.

US valuations

The US stock market, though, does traditionally command higher stock valuations than the UK. There are many ideas about why that’s the case. But it still seems strange to me, especially when most of the companies in the Footsie are just as global as their American counterparts.

But one thing does seem clear to me. The FTSE 100 looks like a much better place for me to invest my cash, in my search for the best long-term dividend yields I can find.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »