We want share prices to keep going up, don’t we? Over the long term, yes. But short-term weakness is an investors friend, and it can provide us with some great buying opportunities. Right now, I think the FTSE 100 is full of great shares unfairly marked down, offering up some terrific high dividends.
Over the past five years, the FTSE 100 has risen by a paltry 7%. Over the same period, the UK’s mid-cap index, the FTSE 250, has put on 25%. Now, smaller stocks typically show better growth, though come with a higher level of risk. But even then, 25% over five years is nothing special.
UK stock markets have been hammered by international indexes too. In the USA, the S&P 500 has risen by 60% in five years. And the Nasdaq 100, which is home to a lot of high-tech companies, has more than doubled. Even in Japan, where the economy looks like heading into recession, the Nikkei 225 has managed a 25% gain, in line with our FTSE 250.
But what about Europe where times are tough? Even the German DAX and the French CAC 40 have easily beaten the FTSE 100, both posting gains of more than 20%.
Research by Barclays shows UK shares have produced returns over the last century, on average, of around 4.9% above inflation per year. At current inflation levels, that suggests we should expect a total return of around 6.8% per year. And on that score, the UK’s top index really does look like it’s lagging.
That total yield does include dividends, so all isn’t lost. And with so many FTSE share prices stagnating, dividend yields have been rising. According to AJ Bell‘s Dividend Dashboard, we started out in 2017 with expected total dividend yields of 4.2% from the FTSE 100. Today, in the early days of 2020, we’re looking at something around 4.7%. That represents an expected payout of £91.1bn, which would be a new record.
Regular dividend rises, reaching new levels each year, are what we should expect overall. That’s all that’s been happening, really, and it does suggest UK-based companies are doing fine, despite general economic weakness and political uncertainty.
But there’s another thing that usually happens too. Companies raise their dividends, and that makes their shares more attractive. More people then buy the shares, pushing prices up a bit, and that keeps dividend yields pretty much pegged at a consistent levels. And those levels reflect a balance between the expected reward and the expected risk.
But that’s clearly not been happening, and it’s led to today’s elevated dividend yields. Presumably, that’s because investors are seeing greater risk associated with FTSE 100 shares these days. Over the short term, I’m certainly seeing uncertainty – and it seems to be all about Brexit. But I really don’t see any great long-term risk with FTSE 100 shares, and I think the market is underpricing them today.
When the uncertainty recedes, I think FTSE shares will move back towards long-term gains, and dividend yields will be pulled back down closer to long-term levels.
But until then I’m buying, and I think 2020 could be one of the best years I’ve seen for investing in shares.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.