FTSE 100 shares continue to be among the most popular equities in the UK. These leaders of industry represent the biggest and supposedly best businesses on the London Stock Exchange. And yet, when looking at the index’s performance lately, it’s left a lot of investors wanting.
Admittedly, the ongoing economic conditions don’t exactly offer an ideal environment for companies to thrive. And when taking a look over the last three years, the index is up by a grand total of only 15.6%. On an annualised basis, that’s just 4.9% — barely covering inflation over the same period.
Considering savings accounts today are offering up to 5% risk-free interest rates, why would an investor even consider shares in 2024? Well, despite appearances, the UK’s flagship index has actually had a pretty impressive run because of one important factor not captured by its chart — dividends.
Dividends make the difference
With a large portfolio of its constituents being mature enterprises, FTSE 100 shares primarily shine when it comes to generating a passive income for shareholders. And when factoring in these payouts over the last three years, the total return more than doubles from 15.6% to 33.1%!
That brings the annualised rate of return to 10%, which is ahead of its historical average of 8%. And that’s even after suffering through one of the most severe market corrections we’ve endured since the 2008 financial crisis.
With the tide turning and recovery now potentially under way, analysts at AJ Bell expect FTSE 100 dividends to rise in 2024 and 2025. As such, looking at snapping up top-notch stocks today could be a lucrative move for investors in the long run.
Risk and reward
While the index as a whole has performed admirably, not every constituent has fared so well. In fact, quite a few have struggled under their own weight and some have subsequently been kicked out in the last reshuffle. And I wouldn’t be surprised to see more companies fall down into the FTSE 250 due to the pressure from higher interest rates taking its toll.
Therefore, while I’m optimistic that 2024 will be a good year to buy shares in this index, I’m also aware that not every company is going to be a blockbuster investment. For index investors, this is less of a concern. But for stock pickers seeking market-beating gains, due diligence is more important than ever.
Just because a business is large doesn’t automatically make it high quality. Therefore, a careful analysis of both the quantitative and qualitative characteristics of each firm is paramount to avoid making bad decisions.
A thriving business today may not stay that way if threats are rising on the horizon. Similarly, a struggling firm could be a terrific investment if management has a viable strategy to turn things around. A prime example of the latter would be Rolls-Royce that was brought back from the brink of bankruptcy after a radical shift in strategy by a new CEO.
