With a dividend yield of 4.1%, the FTSE 100 appears to offer a strong income outlook. Its income return is currently significantly above inflation, while the index offers a degree of diversity which is relatively high.
Given the prospects for the UK economy in terms of the impact of Brexit, as well as the uncertainty which has been present in recent months, the index appears to offer an enticing risk/reward ratio. That’s especially the case when its income return is compared to other assets, with the index seeming to offer an impressive outlook for income-seekers.
A changing period
After a decade of low interest rates, higher levels of inflation are prompting central banks across the developed world to tighten monetary policy. In the UK, the Bank of England has already raised interest rates once, and is expected to do so again in the coming months. This could increase the appeal of other income-producing assets such as bonds and cash on a relative basis, although the FTSE 100 is still likely to have greater income potential.
The key reason for this is that the Bank of England is likely to raise interest rates at a slow pace. Inflation has recently declined, while with Brexit now less than a year away policymakers are unlikely to seek to choke-off the UK’s GDP growth rate. As such, with a 4.1% dividend yield, the FTSE 100 is likely to offer a significantly higher return than most highly-rated bonds and savings accounts over the coming years.
Risk/reward
As well as a higher potential return, the FTSE 100 could offer income-seeking investors less risk than previously thought. As well as having exposure to a wide range of companies operating in a number of different sectors, the index has an international bias. In fact, a significant proportion of its incumbents have limited operations in the UK, and so are not especially reliant upon the domestic economy for their sales and profitability.
Most companies in the index, though, report in sterling. This means that if Brexit talks fail to progress as smoothly as had been expected and uncertainty builds in the coming months, the index could gain a boost from a weaker pound. This may help to increase the profitability of the index’s incumbents, which could boost their valuations and lead to higher total returns for investors. And with higher profitability could come greater dividend sustainability over the medium term.
Valuation
A dividend yield of 4.1% for the FTSE 100 is historically high. It suggests that as well as offering a high income return, the index may be undervalued. Having risen by just 15% over the last five years, it could offer a high degree of capital growth alongside its impressive income prospects. As such, now could be the perfect time to buy it for the long term.