While there are risks involved in buying FTSE 100 dividend shares, there may also be a far higher chance of delivering impressive long-term returns compared to playing the lottery. The odds of winning the National Lottery are one in 45m, which means that for the vast majority of people they will lose considerable sums of money during their lifetimes through purchasing related tickets.
In contrast, buying modest amounts of large-cap dividend shares could prove to be a sound strategy. It may lack the excitement of gambling, but could provide a more favourable financial position for individuals who aim to build a second income in the long run.
Dividend yields
With the FTSE 100 currently having a dividend yield of over 4%, the index appears to offer significant income investing potential. Compared to its historic range, a yield of over 4% is relatively high and arguably doesn’t represent the growth prospects of the world economy.
As an international index, the FTSE 100 has exposure to a variety of regions. It may be possible for investors to benefit from the high growth rates of emerging economies, for example. Or they may be able to capitalise on the strong rate of growth being recorded in the US at present. Either way, buying a variety of large-cap income shares could lead to impressive dividend growth, as well as significant capital growth as the index benefits from what appear to be favourable conditions for the global economy.
Income return
Of course, it’s fairly straightforward to generate a portfolio yield which is much higher than that offered by the FTSE 100. A wide range of stocks have yields of 5%, or even 6%. They could make a real difference to an individual’s long-term portfolio performance, since various studies have shown it’s the reinvestment of dividends which makes the biggest difference to total returns in the long run.
With high yields also suggesting there are margins of safety on offer, an investor who buys large-cap dividend stocks may not have the same level of overall risk as other investors who focus to a larger extent on growth. Rising dividends suggest financial strength, as well as confidence from the company’s management in the future growth potential of the business. Therefore, sticking to stocks with solid track records of dividend growth could be a shrewd move.
Investing vs gambling
Of course, buying lottery tickets can be fun. It’s exciting to see the numbers read out in the hope that they match the ones displayed on the purchased ticket. However, the reality is that buying lottery tickets is not going to have the desired impact for almost everyone who plays.
In contrast, building a portfolio of FTSE 100 dividend shares could have a real impact on the lives of a large number of people. As such, it seems to offer a better use of risk capital over the long term.