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The FTSE 100 dividend yield (14 October) looks pretty meagre, doesn’t it? Investors picking up a Footsie index tracker would be looking at a yield of 3.09%.
That compares unfavourably with savings accounts. Many Cash ISAs pay close to the interest rate of 3.75% – a figure which looks likely to grow soon too.
It looks even worse when looking at bond yields. The UK 10-year gilt yield currently stands at 5.5% and the 30-year yield at 5.9%. And rental yields on buy-to-lets can go even higher than that!
Why bother with the FTSE 100 then? Is there any point in trying to build an income from London’s leading index? Well, actually, there is…
Cash in the bank
To start with, those purely interested in a ‘cash in the bank’ income stream are missing out on what share dividends can create in a shares portfolio targeting them. The FTSE 100 has stocks offering 7%-9% at the top end. A bigger advantage can be individual stock-picking over choosing index funds.
Moreover, dividends only tell part of the story. If we include share buybacks (which are another form of shareholder returns) then the yield is 5.1% at the moment – a significant jump from just dividends.
We can go another step further too. The earnings yield of the FTSE 100 at the moment is 7.5%. Much of those profits are used for investment or to pay down debt and the like, but it still contributes to the company as a whole.
Perhaps the best way to judge the FTSE 100 though, is in its long-term returns including all dividends and share price appreciation. One notable study on UK stocks going back to early 1900s found an average return of around 9%. But that doesn’t mean there’s any guarantee of that in the future, of course.
One option
I can illustrate this dynamic with an example. Investors might think the banking sector would be an easy hunting ground for dividend investors. Earnings have been rising, so why do Barclays (LSE: BARC) shares pay a measly yield of just 2.64%?
There are a number reasons. A £1bn buyback programme is part of the equation, to be sure. The money spent on buybacks is another form of returning cash to shareholders. I should mention that big buybacks can get unwanted attention, like from a government thinking about a windfall tax – that’s a risk to be aware of.
But with a booming US investment arm, there’s more to the company than a simple dividend. This can be seen through a surging share price. Barclays shares were as low as 129p three years ago. They’re now at the dizzying mark of 439p. I don’t think investors have been too concerned about a below-average FTSE 100 yield with that kind of performance. I think Barclays could be worth considering for the future too.
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John Fieldsend owns shares in Barclays.
This story originally appeared on Motley Fool
