So far, May is proving to be another volatile market for broader stock indices. Therefore today, I want to look at how Britons can potentially give a boost to their long-term portfolios by investing in robust dividend shares.
Why stock markets and dividends exist
Most investors realise that all investments carry some risk. Fear and greed are two elements of human nature that tend to affect short-term moves in share prices.
If stocks suffer large losses for a sustained period, or fall fast like they did earlier in the year, then markets usually become fearful. In times like those, it is important to remember why equity markets, which I believe serve the wider economy well, actually exist.
By listing in an index, a company can raise capital to grow its business. Instead of borrowing money from a financial institution such as a bank, a firm can instead sell shares to investors. And a stock, or a share, represents part ownership of a given company.
There are two ways most retail investors can make money from their stock investments.
First of all, if they sell their shares at a price higher than the purchase price, then they make a profit. Also, if the company pays dividends annually from the profit it makes, then a long-term shareholder would receive that payout. Company boards set payout schedules and dividend dates.
Especially since the dotcom boom that started in the late 1990s, it has become relatively easy to be ‘seduced’ by the prospects of large gains by investing in stocks that are regarded as high-growth. Although fortunes can be — and have been — made in many such companies, booms can easily be followed by busts.
Therefore the City tends to regard companies that pay dividends as more stable than those that do not. Over the long term, their share prices tend to be less choppy too.
On a historical note, companies have been paying out dividends for over four centuries. In 1602, the Dutch East India Company (VOC) became the first company to issue shares. which were traded on the Amsterdam Stock Exchange. And VOC was known for its high dividend payments.
FTSE shares
On 7 May, the Bank of England (BoE) decided to keep the main interest rate unchanged at 0.1%. The BoE website details the progressive decline of interest rates over several decades. As you can see, 0.1% is a record low.
In the near future, no bank account will likely offer anything close to a real rate of return. Thus FTSE 100 or FTSE 250 dividend shares could be a good option for income investors. In 2019, their average dividend yields were about 4.5% and 2.8% respectively.
Yet recent days have seen dividend cuts announced by a wide range of companies. But, with a bit of due diligence, investors can still find chunky dividend yields on offer. And prices of many these companies are a lot cheaper than they were in January.
Seasoned investors look for value stocks that have robust earnings and dividend sustainability. There are several companies I’d consider buying, especially if there’s any further weakness in their share prices. In the FTSE 100, they include BAE Systems, GlaxoSmithKline, Pennon Group, Tesco and Unilever.
In the FTSE 250, I like Britvic, Centamin, ContourGlobal, Greencoat UK Wind, and Tate & Lyle as potential long-term investments.
