After the worst third-quarter in a decade, shareholder dividends look set to come roaring back. And when it comes to picking the best long-term investments, I’d want to have a portion of my money in an FTSE 100 tracker fund.
Why I reckon the FTSE 100 is a decent long-term investment
I see the FTSE 100 as the income index. Indeed, the dividend yield has historically been well above 4% and I reckon that’s a good start for compounding my money for November and beyond.
The main reasons for the FTSE 100’s big yield is the companies listed within it are the UK’s largest, mature public enterprises. On top of that, many operate in cyclical sectors such as finance, oil, mining, retailing and housebuilding. And cyclical stocks tend to pay big dividends as an economic cycle matures. That’s because the market tends to compress valuations while waiting for the next economic downturn to arrive.
Recently, the stock market and dividends from the FTSE 100 have been depressed along with the economic cycle. But I reckon the world economy looks set to recover and grow over the next couple of decades. And that growth will be expressed in the stock market with increasing company dividends and share prices.
To me, an FTSE 100 tracker fund would be a decent way to capture some of that capital and income growth. I’d go for an instrument such as Legal & General UK 100 Index. However, I’d be sure to select the accumulation version of the fund rather than the income version because it’ll automatically plough back in my dividends. That way, I’ll be on the road to compounding my returns.
Strong brands and consistent dividends
Today’s depressed share prices also throw up opportunities in individual-company stocks. My second pick is a stalwart within the FTSE 100 index called Diageo (LSE: DGE). In case you don’t know, the firm owns many of the UK’s much-loved and ubiquitous premium alcoholic drinks brands, such as Bell’s, Smirnoff, Captain Morgan, Bailey’s, Gordon’s, Guinness and many others.
The strength of those brands and the way people love them makes for an impressive trading and financial record. Over the past five years, revenue, earnings and cash flow have been rising. However, the coronavirus pandemic dented the progress a little. Nevertheless, Diageo hasn’t missed a beat with paying out shareholder dividends. And City analysts predict a strong bounce-back in earnings for the trading year to June 2022.
The stock rebounded immediately after the coronavirus stock market crash. But since then it’s been drifting lower, which means the valuation has become a little better. However, it’s fair to say the well-known attractions of Diageo as an investment mean it rarely sells at bargain levels.
Indeed, the stock has looked expensive for as long as I can remember and will probably remain so. And with the share price near 2,560p, the forward-looking earnings multiple for the trading year to June 2022 is just above 20. Meanwhile, the anticipated dividend yield is just over 2.8%. The yield may look modest, but it’s growing. And I reckon a holding in Diageo now will serve me well over the next 20 years as a decent vehicle for compounding my gains.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Diageo. 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.