On New Year’s Eve 1999, the dotcom bubble was fully inflated. The FTSE 100 ended the year at 6,930 points. At market close on 20 May 2025 the index stood at 8,781 points. That’s a gain in more than 24 years of just 27%, which is pretty awful.
It suggests £10,000 invested just before the century ticked over would now be worth only around £12,700. But the true potential is a lot better than that. And it’s all because of dividends.
The value of dividends
The long-term average FTSE 100 dividend yield is around 3.5% a year. So dividends would have added about an extra £8,400 to bring our total up to £21,100. But what about reinvesting the cash in more FTSE 100 shares?
I’ve done some calculations based on reinvesting and compounding that annual 3.5%. And I reckon the dividend portion of the potential return since 1999 would be worth £13,100. That would push our initial £10,000 up to £25,800.
And that’s for someone unlucky enough to have put down their entire 10 grand just before the biggest stock market crash of the century so far. The FTSE 100 fell 50% in the following three years.
How can we do it?
I think it shows we can make handsome profits from investing in the London stock market, even with poor timing. But we do need to follow a few key rules. One is to reinvest those dividends. Then we need to avoid regular buying and selling — even a couple of percent a year in costs could hit our gains.
And finally, it’s all about the long term. I estimate it would have taken around five years for the FTSE 100 to break even from the end of 1999, even with dividends.
But how can we actually do it without spending many hours in deep research? One straightforward way is to buy a FTSE index tracker like the iShares Core FTSE 100 ETF (LSE: ISF)
Tracking FTSE 100 stocks
The fund spreads investors’ money in proportion to the valuation of the stocks in the index. So it can come very close to the FTSE 100 itself. And charges are low, with an ongoing annual charge of 0.07% and a transaction cost of 0.05%.
I’d rate an exchange-traded fund like this as one of the best things to consider for someone opening their very first Stocks and Shares ISA. It still leaves us at risk of a stock market slump, like the big one that opened the current century.
But we get diversification too, across all the sectors in the market. Anyone holding only high-valued internet stocks at the end of 1999 could soon have been nursing losses of 90% or more. Diversification can really help soften the blow of single-sector crashes.
Better future?
It’s worth remembering that the period we’re looking at here started at the peak of a stock market bubble. And in the past 20 years, starting after the subsequent slump, the FTSE 100 has managed a 6.9% average annual return.
