Dividend investing continues to be hugely popular. Various research shows that it’s the reinvestment of dividends that can have the biggest impact on a portfolio’s total return over the long run. As such, and while inflation has moved lower in recent months, dividend shares are likely to remain in demand among investors over the long run.
While searching for high yields can be a worthwhile pursuit, investing in the FTSE 100 tracker fund could be a simple means of generating a high income return. The index offers a dividend yield of 3.8% at the present time, which is towards the upper end of its historical range. This suggests that it could offer good value for money. And with tracker funds offering fees that could be lower than 20 or 30 basis points per year, they may be able to provide investors with a simple, low-cost means of beating inflation over the coming years.
Furthermore, holding units in a tracker fund means that risk is reduced versus owning company shares directly. Company-specific risk is almost entirely diversified away through an index tracker, and this could significantly enhance the risk/reward ratio of a portfolio.
While investing in a FTSE 100 tracker fund seems to make sense, buying shares in companies could also be a worthwhile move. For starters, it’s possible to generate a much higher income return than the FTSE 100 at the present time. A number of the index’s constituents have dividend yields that are above 4%, or even 5%. And many of those stocks are expected to raise their dividends over the next couple of years at a pace above inflation. This could provide their investors with an even more enticing income prospect.
Furthermore, there are a number of shares in the UK’s main index that seem to currently offer low valuations. Stocks such as Imperial Brands, BP and Vodafone offer yields in excess of 5% and yet appear to have bright future growth prospects. All three companies also have relatively solid balance sheets, with Imperial Brands set to enjoy growth from next generation products. And with BP’s profit moving higher from a rising oil price and Vodafone’s investment in acquisitions set to pay-off, their dividend growth prospects seem to be encouraging.
As a result, investing in FTSE 100 shares could be an even better move in the long run than investing in an index tracker. Both could form part of a wider portfolio strategy, with the index seeming to have significant income opportunity right now for dividend seekers. It may still be below its starting point in 2018 after failing to ignite investor sentiment in recent months, but this could make the index even more attractive for long-term investors.
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Peter Stephens owns shares of BP, Imperial Brands, and Vodafone. The Motley Fool UK has recommended Imperial Brands. 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.