I’m a huge believer in the long-term power of FTSE 100 dividend income shares, but lately my faith has been shaken.
I’ve got two ultra-high yielders in my self-invested personal pension (SIPP), both of them in the financials sector. Both have given me plenty of income over the last 18 months, but share price growth? That’s been in short supply.
This may be about to change. No guarantees, but I’m seeing hopeful signs.
My dividend stocks have huge potential
The two stocks are insurer Legal & General Group and fund manager M&G (LSE: MNG). Both are down around 5% over the last 12 months. Over five years, they’re down 24% and 14%, respectively. Now they’re sparking into life.
I’ve been waiting for this moment. My theory is that when interest rates finally slide, ultra-high yield dividend stocks like these two will look even more attractive.
Why? Because yields on safe haven asset classes such as cash and bonds will fall with interest rates, but dividends shouldn’t. This may encourage investors to take a little more risk with their capital, to grab that higher income. Legal & General currently has a trailing yield of 8.5%. M&G’s yield is even higher at 9.25%.
Cash and bonds will never compete with that. As the yield gap widens, more investors will be tempted to make the leap. That could drive up their share prices.
Yesterday (6 February), the Bank of England cut base rates for the third time since August, to 4.75%. Legal & General and M&G jumped around 2% in the aftermath. This continues a trend. Both are now up 7% in the last three months.
I’ll use M&G as my example (but could just have easily chosen Legal & General). I bought its shares in July, September, and November 2023, investing £6,000 in total. My average entry price was 199p. As I write, they trade at around 215p. My stake is up 8%. Or £480 in cash terms. And yes, I know, that isn’t exactly Nvidia.
The FTSE 100 is back!
However… I’ve also received a staggering £791 worth of dividends. Already. My total return is 21%. My £6k is now worth £7,271.
Some won’t be impressed, but I am. I’m due two more dividends this year, in May and October. Rough maths suggest I’ll get around £500. That’ll push my total return towards 30%. In just over two years. If the shares rise further this year, that will be on top.
I plan to hold M&G stock for five, 10, 15 years… longer if I’m lucky. At today’s pace, my stake could pile up nicely.
None of this is guaranteed. Sky-high yields like this one can be vulnerable. Volatile markets and a slowing global economy could hit take their toll. A potential trade war adds another layer of threat. If M&G’s profits fall, shareholders payouts could be slashed.
And if inflation continues to prove sticky, interest rates could stay higher for longer. Along with yields on cash and bonds.
As a buy-and-hold investor, I can afford to overlook those short-term risks. Instead I can sit back and enjoy watching my capital and dividends grow. Roll on the next base rate cut.
