Dividend stocks were all in rage in 2021, as FTSE 100 dividend yields reached dizzying heights. However, I am a not so sure if 2022 will be quite as good. For anyone who might be interested in the details, I have written extensively on this in another article explaining three reasons why my passive income could fall this year.
But in a nutshell, I think dividends could decline now because the biggest dividend yielders could slow down. My reference is of course to industrial metal miners, that pretty much hit a windfall in 2020 on high government spending that carried into the next year as well. Now other segments could slow down too as inflation takes a toll on margins. In any case, high inflation is eating into my real passive income. So there is that as well.
Defined time frame is essential
So how exactly should I invest in dividend stocks now? Well, I think this might be a bigger challenge if I were looking at investing for the short term. My perspective is more focused towards the long term or at the very least the medium term, which is the next three to four years. So at least some of the fluctuations in dividends could get ironed out over time.
FTSE 100 dividend yields over the years
Let me explain this with an example. Consider the FTSE 100 Anglo-Australian miner Rio Tinto. It has had some of the highest dividend yields over the past year and a half or so, comparable only to its peers Evraz and BHP. At present its yield stands at 9%. However, this was not always the case. Its average yield over the past five years has been at 6.2%. Now, consider FTSE 100 electricity provider SSE, which has a present dividend yield of 5.2%. Today its yield looks much lower than that of Rio Tinto’s, but here is the rub. Its five-year average dividend yield is actually higher at 6.6%!
Essentially, what this says to me is, if I can just wait a few years, I might not be any worse off even if my dividend yields were to decline today or look relatively low today. Of course I could keep reallocating my investments all the time to make the most of dividend yields. But frankly, I think that is way too much work if I am not looking at investing full time.
Long-term dividend earnings
If I could wait even longer, say, 10 years or so, the results are even more surprising. As per recent AJ Bell research, if I had invested in FTSE 100 stocks a decade ago, the biggest dividend yield for me would have been from the industrial equipment rental company Ashtead. This sits oddly with the fact that the stock has a paltry dividend yield of 0.9% right now. Even its five-year yield is 1.4%.
So how has this managed to happen? Ashtead’s stock price has grown so fast over time that even though it has grown its dividends, its dividend yield has remained small. Which gives me another insight into dividend investing: I might want to consider both dividend growth and dividend yield while looking to buy solid FTSE 100 stocks to buy with £10,000.