According to IG, between 1984 and 2019, the FTSE 100 rose by 654%.
However, the dot-com bubble near the start of the century caused the index to trade close to today’s level. If I’d first bought a Footsie tracker fund back then the price now would be more or less back where it started.
Why I’d invest in FTSE 100 dividend stocks
But Cazenove Capital pointed out a while back that I could have made a return on my investment near 100% over the past 20 years. And that’s despite the level of the index ending up flat.
The key to achieving that return would have been to reinvest all the dividends along the way. And it’s the compounding effect of earning returns upon returns that would have saved the investment from a negative return.
Those figures serve to underline just how important dividends are regarding the total returns available from the stock market. And, over long investing periods, a dividend reinvestment policy can help to mitigate periods of price underperformance.
I like the idea of investing in the FTSE 100 index via a tracker fund. There’s wide underlying diversification over around 100 different companies. However, the index is weighted according to market capitalisation. So that means the underlying performance of the largest constituents mainly drives a Footsie tracker.
And the top 10 names are a useful bunch. There are cash-generating defensive names in the lists, such as pharmaceutical companies AstraZeneca and GlaxoSmithKline. And fast-moving consumer goods outfits like Unilever, Diageo, and British American Tobacco. But there are also companies operating in cyclical sectors such as banker HSBC Holdings, miners Rio Tinto and BHP, and oil companies BP and Royal Dutch Shell.
Defensive versus cyclical businesses
To me, the defensive companies are potentially ideal for a dividend-led investment strategy because of their often stable cash flows, whereas cyclical companies can be up and down. At times they yield big dividends. But earnings, dividends, and the stock price tend to cycle lower from time to time leading to a volatile investment.
Nevertheless, I’d invest in a FTSE 100 tracker fund as part of my long-term dividend-led strategy. However, future returns are not guaranteed. And reinvesting dividends in the years ahead may not save me from price underperformance in the future even though it has before.
But I’d also consider investing in the shares of individual companies within the FTSE 100 index. And by doing that I can allocate a higher weighting in my own portfolio to some of the smaller constituents in the index. For example, I’d be keen to research energy companies such as National Grid and SSE. I also like the look of water company United Utilities and supermarket chain Tesco. And I’d run the calculator over smoking products company Imperial Brands.
I think these defensive names are some of the best FTSE 100 dividend stocks to buy now. But all shares carry risk and a positive investment outcome is not certain. Nevertheless, I’d embrace the risks and aim to build a portfolio of dividend-paying shares to hold for the long term.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco, Diageo, GlaxoSmithKline, HSBC Holdings, Imperial Brands, National Grid, and Unilever. 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.