Here’s why the FTSE 100 is a great place to invest for 2018 and beyond

As I write, the week before Christmas, the FTSE 100 is up around 6% since the start of 2017. 

Now, you might not be too impressed by that after 2016’s performance, with London’s top index now up a cracking 25% over the two years. But the boom following 2016’s Brexit referendum is a bit misleading due to the crash in the value of the pound — while the value of shares in pounds has risen strongly, those pounds are worth considerably less now.

And this year’s 6% is actually pretty good, especially when you can add on about another 3% in dividends — 9% per year would be a superb long-term average, and would turn £1,000 into nearly £2,400 in 10 years.

Over a rocky five years, the FTSE 100 is up around 25% (plus dividends), and again that’s a great performance which could make you very wealthy over a lifetime.

Biggest did best

But after examining the index overall, I started to look at some of its biggest companies, and the results are very interesting. Starting with the current 10 biggest stocks by market capitalisation, I checked their five-year performances. I won’t list them all, but the biggest of the lot, Royal Dutch Shell, brought in a 10% return (during the oil crisis), while the one in 10th place, Unilever, put on a whopping 75% for the biggest gain. 

GlaxoSmithKline was the poorest performer with a 5% fall, but sector compatriot AstraZeneca gained 62%, with British American Tobacco just behind on 59%.

But get this — the total share price return from the 10 biggest stocks over five years came to 33%, beating the FTSE 100’s overall 25%. And in their last full year, the average dividend yield from these biggest companies came to 4.6%, which is well ahead of the index.

Top dividends

That made me wonder how the current 10 biggest dividend-paying stocks have done over the same period. So I selected the 10 with the biggest prospective total dividend yields (which are mostly expectations for the 2017 full year) and examined the past five years again — and the results took me by surprise.

Of course, the average prospective dividend yield is higher, at 6.6% — and that, reinvested and compounded over the long term, would result in a very nice overall return even without any capital appreciation.

But the big shock for me is that the top 10 dividend stocks provided the best capital gains too. The range was considerably more volatile, with Centrica shares losing 41% over five years, but housebuilders came good with both Taylor Wimpey and Barratt Developments more than trebling in price.

The overall share price gain? A cracking 48%, which knocks spots off both the 10 biggest and the overall FTSE 100.

Beating the FTSE

Now, this does not represent proper back-testing, which would require far more digging into past data. But I do find the outcome intriguing.

The biggest companies tend to be the ones that have been there for years, and are stable in their annual profits, so you’re avoiding the riskier smaller constituents which are more likely to lower the FTSE 100’s overall returns.

And the FTSE 100 high-yield strategy is a very popular one, especially with investors looking for steady income — but it just might surprise you how good its capital appreciation can be.

There will be some ups and downs for sure, but I can think of worse ways to invest in 2018.

Selecting the best

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended AstraZeneca and Royal Dutch Shell. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.