Yes, you read the title right. Investments in FTSE 100 stocks can be rewarding in terms of both capital gains as well as dividend income at any point. But the real gains sometimes become obvious only after years. And when I look back, it is possible to have earned as much as a 30% dividend yield over time.
Surprising FTSE 100 stocks with high yields
Let me explain. Recent research by investment platform AJ Bell shows dividend yields today based on 2011 prices. The idea behind this is to highlight how fruitful it can be to hold stocks over a long time, even if their dividend yields do not look terribly impressive to start with. For example, the stock that has given around 30% compounded annual returns over the past decade is, surprisingly, the FTSE 100 construction biggie Ashtead.
Now, the company is not known as a star dividend stock, by any stretch. The contrary, in fact. Its current yield is actually a minuscule 0.7%, making it among the lowest dividend-yielders today. The average FTSE 100 stock has a dividend yield of 3.4%, which puts this into perspective.
Yet, the company has been able to end up at the top of the heap when we consider yields over the last 10 years. How? Well, it has grown its dividend by 29% on average each year. But since it is a growth stock that defies gravity, its price has increased as well. So at the current price, its dividend yield might never look impressive. But over time, it stands out.
Not an abberation
And this is not an aberration associated with just one stock. There are more learnings to be sussed out from this exercise. Three other stocks have also wound up with double-digit dividend yields on average over the last 10 years. These are Intermediate Capital Group, London Stock Exchange, and DCC, with yields of 24.6%, 10.9%, and 10.1% respectively. And here is the rub. At today’s prices, all three of them have dividend yields at around 2.5% levels, below the FTSE 100 average.
So clearly, I now believe that as an investor I should look more closely at dividend growth for my long-term investments. This can even redefine where I allocate my investments for income generation.
High dividend yields could matter too
But this does not mean that stocks with high dividend yields today are not fruitful over the long term as well. FTSE 100 utilities like National Grid and United Utilities have turned in an average annual dividend yield of 7.9% and 7.2% as well. There are pretty decent numbers by any standards. And here is the best part about these stocks. Even back in 2011, their dividend yields were decent. National Grid’s was 6.3% and United Utilities’ was 5%.
These learnings indicate to me that considering both dividend yields and dividend growth could be a good way to ensure my best outcome for passive income over time.