What’s the UK’s first post-Brexit decade going to look like from an investing perspective? Well, it wouldn’t really take much to beat the past 10 years, which have seen the FTSE 100 gaining just 40%.
While that’s not a great record, when dividend yields are added it actually looks more respectable considering the tough economic years we’ve suffered. However, I’m expecting better to come.
According to the latest Dividend Dashboard from AJ Bell, the UK’s top index is expected to provide an overall dividend yield of 4.8% in 2019. In 2017 that figure stood at 4.2%, with yields having been gradually edging upwards for a few years now.
That includes all those FTSE 100 constituents that only pay modest dividends or no dividends at all, and if you select only the highest dividend stocks you should be able to do significantly better. In fact, right now, a quarter of all FTSE 100 shares are offering dividend yields of 6% or more, with an average yield among that top bunch of 7.8%.
Dividends aren’t guaranteed, of course, but it does suggest that if you buy top dividend shares in a Stocks and Shares ISA, you should do well over the next decade. A portfolio of those top 6%+ shares with dividends reinvested would, assuming the dividends were maintained at the current forecast yields, more than double your money in 10 years – and that’s assuming no share price growth at all.
Interest rates are low, with Cash ISAs offering only around 1.5% if you can find a good one, and that makes me see today’s high Footsie dividend yields as even more of an anomaly. When interest rates are low, I’d expect to see investors heading for the far better rewards they can get from stock dividends – and that in turn would push share prices up and get dividend yields down closer to their longer-term levels.
Financial stocks figure heavily among the big yielders, and they come with low price-to-earnings valuations too. Legal and General, for example, is predicted to yield 6.5% and it’s shares are on a P/E of only 8.3. Aviva‘s dividend is even higher at 7.2% with a P/E of only 7.4, and Royal Bank of Scotland is set to yield 6% on a multiple of 8.6.
It’s not just financials, which probably face the greatest Brexit risk, with BP and and Royal Dutch Shell both forecast to yield 6.3%, with forecast P/E ratios of around 13.
Overall, this combination of high dividend yields and low stock valuations does seem to indicate that investors have been running scared from shares for some time, and the rising price of gold supports that. In uncertain times, people turn to the yellow metal to try to preserve their wealth for better times, and that’s pushed the price of an ounce up from around $1,060 in January 2016 to $1,470 today.
What might bring about an upwards revaluation of shares? I think the end of Brexit uncertainty combined with a cessation of Donald Trump’s trade wars will settle nerves and tempt institutional investors back to shares – and both of those seem very likely to happen in the next 12 months.
I reckon that means we’re in the best time to invest within a Stocks and Shares ISA that I’ve seen in more than a decade.
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Alan Oscroft owns shares of Aviva. 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.