I reckon choosing solid FTSE 100 dividend shares can be a decent, almost hands-free way to get my investments compounding. And compounding gains is key to the generation of wealth.
Careful selection of FTSE 100 dividend shares
But I need to select my investments carefully. It would be easy to pick stocks with superficially attractive, but unsustainable, dividends. And that’s one of the reasons I’m wary of firms operating in sectors with a lot of cyclicality.
When they are trading well, cyclical businesses often sport big dividend yields. But cyclical firms can deliver famine or feast outcomes for their shareholders. Dividends can be ‘here today and gone tomorrow’. And, on top of that, the volatility of cyclical share prices can be severe. Holding shares like that can feel like a circular journey over time with little progress in my share account.
Of course, cyclical businesses can also grow their operations over the long term. So, they aren’t always hopeless investments. But for my dividend-led strategy, I’m avoiding cyclical stocks, such as banking firms like Lloyds and Barclays. And that’s despite their high-looking dividend yields.
For me, a potentially steadier way to double my money with FTSE 100 dividend shares is to select companies operating in less cyclical and more defensive sectors. It’s true the headline yields today may be a little lower. But often, those businesses can do a decent job of increasing shareholder payments over time.
So, I like FTSE 100 dividend shares such as Unilever, Reckitt, Diageo and British American Tobacco in the wider fast-moving consumer goods sector. And I’m keen on pharmaceutical businesses such as AstraZeneca,and companies in the energy sector like National Grid.
Aiming to double my money
For my dividend portfolio, I’d aim to buy FTSE 100 dividend shares like those at opportune moments, such as on down-days, dips, and after ‘bear’ moves. Or perhaps when news flow causes a temporary setback in a stock’s price. Then I’d aim to hold for years while reinvesting the dividend income. And to make the process as hands-free as possible, I’d likely use a cheap dividend reinvestment option with my share account provider.
And I can get a quick estimate of how long it will take my FTSE 100 dividend shares to double my money by using the rule of 72. If I divide 72 by the estimated rate of return, it will throw up the answer in years.
So, let’s assume I can achieve an average annual dividend return for my entire portfolio of 3.5%. Dividing 72 by that figure tells me to expect the value of the portfolio to double in around 20 years. However, the calculation takes no account of businesses increasing their annual dividend over time. And it also ignores any gains from rising share prices.
On the flip side, businesses can decrease or even halt their dividends. And share prices can go down as well as up. However, I’m prepared to embrace the risks. But key to the success of the strategy is choosing FTSE 100 shares well. And it’s important for me to buy them at sensible valuations.
