As a long-term investor, I am a fan of two things: undervalued shares and cash dividends. Happily, the UK’s FTSE 100 index offers plenty of both.
Playing Footsie for money
Like my investing hero Warren Buffett, I love buying great companies at fair prices. Currently, the FTSE 100 trades on just 14 times trailing earnings, which seems cheap in geographical and historical terms.
Also, the index offers a dividend yield of 3.3% a year — considerably higher than other major markets’ yields. Investors can choose to spend this cash, or reinvest it into more shares.
According to the latest Dividend Dashboard from stockbroker AJ Bell, FTSE 100 companies could pay out £79.4bn in dividends in 2025. That works out at around £2,776 for each of the UK’s 28.6m households.
Even better, AJ Bell expects these London-listed businesses to buy back over £50.9bn of their own shares in 2025. And from 2022 to 2025, total buybacks could hit £220bn — around 9% of the FTSE 100’s current value of roughly £2.4trn.
In total, the sum of ordinary and special (one-off) dividends plus share buybacks could reach £130.4bn this year. That’s 5.5% of the index’s value, which I see as a great return — before adding rising share prices into the mix.
A fair share of the FTSE
As for my family, we have a widely diversified portfolio that aims to grab a share of this flood of cash in various ways.
First, we invest in low-cost UK index trackers so as to collect the FTSE 100’s ongoing returns at little expense. Second, we invest in all-world trackers, of which the UK accounts for about 3.5%. Third, we own around two dozen different FTSE 100 and FTSE 250 value and dividend shares.
For example, we own shares in Legal & General Group (LSE: LGEN), one of the UK’s leading providers of life assurance, long-term savings, and investment products. Founded in 1836, this Footsie firm today manages over £1.1trn of financial assets for individual and institutional clients.
While working in this industry for 15 years, I grew to admire L&G’s solid business, sound management, and well-known brand. Hence, my wife and I have owned this stock for many years, buying our latest stake in July 2022.
L&G’s various businesses generate lots of spare cash, most of which it aims to return to its owners (shareholders). For example, L&G has bought back and cancelled £500m of its own shares this year. What’s more, its shares offer one of the highest cash yields in London.
As I write, this stock trades at 239p, valuing the group at £13.5bn. The dividend yield is a whisker over 9% a year and is backed by billions of pounds of spare capital. For me, buying this share is one way to grab an even bigger share of the FTSE 100’s cash mountain. Of course, no dividend is ever guaranteed.
As a leading asset manager in Europe, L&G’s fortunes are closely tied to financial markets. If stock and/or bond markets plunge — as can happen when asset prices ride too high — its revenues, profits, and cash flow could suffer. Likewise, fierce competition in the market for pension transfers and lower management fees could curb its future growth. But I’m happy to sit tight as a supportive L&G shareholder!
