I reckon FTSE 100 stocks remain one of the best ways to build serious long-term wealth for my future, for one simple reason. Dividends.
The index of top British blue-chips pays some of the most generous dividends in the world, and could help me get rich enough to retire with a degree of comfort, although I know this isn’t ever guaranteed.
Many investors underestimate the power of dividends. They fail to see how those apparently small payouts add up over time. New research from Interactive Investor confirms what I’ve believed for years. Reinvesting dividends from FTSE 100 stocks is a winner
Some will look at the FTSE 100’s headline level and think it hasn’t done much for two decades. The index spiked to 6,930 on 31 December 1999, at the height of the tech boom, and trades only slightly higher at around 7,125 today. In growth terms, it appears to have delivered little. But that’s an illusion.
FTSE 100 stocks will build my wealth
First, most people will have invested when the FTSE 100 was trading at much lower levels. The index fell to around 3,500 in 2003, after the dotcom crash. If I’d bought an index tracker at that time, I’d have doubled my money in share price growth alone.
Second, wise investors will have been generating dividends and automatically reinvesting them to pick up more FTSE 100 stock. This is how I aim to get rich from equities.
Interactive Investor’s head of markets, Richard Hunter, has crunched some numbers and found that from 1986 to 4 June 2021, FTSE 100 stocks have delivered price growth of 400%. Once you include reinvested dividends, the total return jumps to 1,827%.
Hunter pins this on the power of compound interest. He explains this with a simple equation. An initial investment of just £5,000 would grow to just under £4m after 70 years, assuming an average total return of 10% a year.
Of course, 70 years is a long time, but it won’t be at all unusual for people to invest for 40 or 50 years. Especially now that fewer purchase annuities at retirement, and leave their money invested in stocks and shares via drawdown. That’s what I plan to do, which gives me plenty of time for my reinvested FTSE 100 dividends to grow.
There are some great dividend yields out there
Despite last year’s dividend cull, FTSE 100 stocks still offer some tremendous yields. Asset manager M&G and British American Tobacco both yield more than 7%. Insurers Aviva, Legal & General Group and Phoenix Group Holdings yield around 6.5%. National Grid, GlaxoSmithKline, BP and Rio Tinto pay income of around 5.5%.
These are solid British companies, but this doesn’t mean they’re risk-free. As we saw last year, dividend payments can be cut as well as increased. I’d invest in around a dozen FTSE 100 stocks, to spread the risk, or a simple FTSE 100 tracker. The index should yield 3.8% this year.
As Hunter points out, there will be stock market drops along the way, but the direction of travel is upwards. FTSE 100 stocks have recovered from the Black Monday crash in 1987, the dotcom boom and bust, the great financial crisis of 2007/2008, and now Covid-19.
