At the end of April, the FTSE 100’s yield was exactly 3.98%. Historically, that’s relatively high and in fact it has only been greater than 4% in recent times during the credit crunch. As such, the FTSE 100’s yield could indicate to investors that the index isn’t only a great place to invest for a high income return, but is also relatively cheap and therefore worth investing in for the long term.
However, the FTSE 100’s yield over the next year may be somewhat less than 3.98%. That’s because 18.78% of the index is made up of resources companies. Many of them are experiencing extremely difficult trading conditions and while some have maintained dividends, they may be forced to cut shareholder payouts in the coming months if the prices of oil, iron ore and other commodities remain low. Were they to do so, the FTSE 100’s yield would clearly fall.
Despite this, that yield is hugely enticing. That’s because while resources companies are likely to reduce dividends unless there’s a step change in commodity prices, other sectors such as consumer goods, utilities and financial services are set to increase dividends at an impressive pace. And with over 80% of the index being made up of non-resources companies, the prospects for a yield of around 4% in the next year are still relatively strong.
Global economy
Looking further ahead, the FTSE 100’s dividend potential remains very encouraging. Part of the reason for this is a global economy that continues to offer the index’s constituents huge profit growth potential.
For example, the Chinese economy is in the process of successfully transitioning towards a consumer-focused economy, which could be good news for consumer goods companies and financial services businesses. That’s because with wealth across the country increasing, demand for products such as clothing, personal care and financial services products is likely to rise. And with a number of FTSE 100-listed stocks already having positioned themselves to take advantage of this future growth, their bottom lines could rise at a rapid rate and allow them to pay much higher dividends.
Similarly, the US economy has huge long-term growth potential – especially since the Federal Reserve now seems content to raise interest rates at a slower pace than it had previously planned. This could cause consumer confidence to remain more buoyant than it otherwise would have been and with economic data surrounding unemployment and GDP growth being strong, FTSE 100 companies with US exposure could perform well in the coming years.
Meanwhile, the UK economy continues to offer a bright future. Certainly, the upcoming EU referendum has the potential to cause uncertainty in the short run. But with the Bank of England adopting an ultra-loose monetary policy and seemingly content to continue with this approach over the medium-to-long term, UK-focused FTSE 100 stocks should be able to raise dividends at a faster pace than inflation.
So, while a fall in dividends for the resources sector seems likely, the dividend appeal of the FTSE 100 remains very high for long-term investors.
