Despite posting an annualised total return of around 9% in the last decade, the FTSE 100 appears to offer excellent value for money at the present time.
For example, a number of its members have dividend yields that are double or even treble the rate of inflation. As such, it may be possible to generate a high income return on a real-terms basis over a sustained period.
As such, now could be the right time to buy a range of dividend stocks within a portfolio. Doing so may provide a surprisingly high total return over the long run which helps to double your retirement savings.
While the income returns available on FTSE 100 shares may provide a generous passive income in retirement, they can also deliver a rising portfolio valuation when reinvested. Since the long-term total returns of the FTSE 100 may prove to be around 7% per year due to the existence of bear markets and downturns, obtaining a large proportion of this from dividends could mean that your holdings do not need to deliver a high rate of capital growth in order to produce market-beating total returns.
In fact, receiving dividends can lead to greater opportunities to invest during the most opportune periods in the stock market’s cycle. In other words, dividends received during bear markets can be reinvested in cheaper stocks that could lead to higher returns being achieved in the long run.
Many of the FTSE 100’s higher-yielding shares are companies that are mature and which operate in defensive industries. As a result, they may provide a degree of stability compared to stocks in the index that are more cyclical.
Given the risks facing the world economy at the present time, a defensive-focused portfolio could produce smoother and less volatile returns. Moreover, dividend payments from companies that are less dependent on the prospects for the wider economy may be relatively robust. This could lead to them offering greater consistency in their total returns, which ultimately produces a more impressive long-term investment outlook.
Furthermore, investors may adopt an increasingly risk-averse attitude over the medium term due to the risks faced by the world economy. Companies that are able to maintain dividend payments, and even produce dividend growth, during such periods may become more popular among investors. This may lead to a rise in their share prices.
A company that can afford to pay a rising dividend may offer improving financial performance in the long run. A growing dividend can suggest management confidence in a company’s outlook, as well as relatively sound financial standing. This can help to provide an investor with a more favourable risk/reward ratio that ultimately leads to higher returns.
As such, investing in large-cap dividend shares could not only reduce your total risk, but also lead to higher rewards. This may produce a larger nest egg from which an income can be drawn in retirement.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.