For many years, the FTSE 100 index has lagged far behind its American counterparts. But perhaps the tide is finally turning in favour of low-priced value shares, rather than go-go growth stocks?
The FTSE 100 fights back
Since the global financial crisis of 2007-09, the Footsie has underperformed the S&P 500 and Nasdaq Composite. Here is each index’s rise over five years:
- FTSE 100: +66.6%
- S&P 500: +145.9%
- Nasdaq Composite: +158.5%
Alas, the UK index finishes a poor third in this race. However, here are the results over 12 months:
- FTSE 100: +9.0%
- S&P 500: +8.3%
- Nasdaq Composite: +8.3%
Therefore, while both US indexes recorded the same growth over one year, the Footsie overtook them to win gold.
Dividend delights
That’s not the end of this story. As well as capital gains, many UK shares pay out dividends. Indeed, the majority of FTSE 100 stocks pay regular dividends to shareholders, lifting the index’s dividend yield to a healthy 3.6% a year. Meanwhile, the yearly cash yield for the S&P 500 is 1.3%, and a mere 0.8% for the Nasdaq Composite.
Thus, by adding this income to the earlier capital gains, then the UK index becomes the clear winner over 12 months. About time, too!
The dividend dilemma
Still, there are three problems with dividends to note. First, future payouts are not guaranteed and be cut or cancelled at short notice. Second, not all companies pay dividends. In fact, US companies usually prefer to reinvest their profits into future growth, rather than return cash to shareholders.
The third problem I call ‘the high-yield curse’. This curse sometimes happens to companies whose dividend yields far exceed the norm. For example, are double-digit dividend yields really sustainable over the long term? And what happens when high dividends aren’t covered by ongoing earnings? There may be trouble ahead…
At its worst, this high-yield curse sometimes smash share prices. For example, when companies axe or slash formerly generous yearly dividends, their share prices can plunge overnight. This has happened repeatedly in UK sectors ranging from miners to housebuilders to telecoms firms.
A fabulous Footsie dividend
One FTSE 100 firm paying a generous (8.8% a year) and rising dividend is Legal & General Group (LSE: LGEN). I’ve written about this UK insurer and asset manager many times since 2020, as I’m a big fan of this business and its strategy.
This 189-year-old household name operates three divisions: asset management, institutional retirement, and retail. Group assets under management total £1.1trn, making L&G one of Europe’s leading asset managers. Business is good, especially with pension risk transfers. Hence, the company aims to return 40% of its market value to shareholders over three years. Whoa.
Furthermore, L&G’s dividend has steadily climbed from 11.25p for 2014 to 21.36p for 2024 — almost doubling in a decade. Note the only year when this payout was not increased was in Covid-hit 2020, when it matched 2019’s payout.
Over one year, this stock is down 5.5%, but is ahead 54.2% over five years. My wife and I own this dividend duke in our family portfolio and love its high yield. That said, L&G’s profits are sure to tumble during the next market meltdown, financial crisis, or full-blown crash. Even so, its abundance of spare capital should help cushion future crises!
