FTSE 100 shares pay an attractive dividend yield of 4.12% today, which is better than almost any savings account. Yet that income is only the start. Over time, it will grow and grow.
The big attraction of buying FTSE 100 shares is not just that they give me a good yield today, but I should get an even bigger one tomorrow. I reinvest all my dividends for growth, which means I am buying more company stock which will soon generate dividends of their own. The number of shares I own will compound over time, as will the passive income they generate.
FTSE 100 shares are great for income
Another attraction is that FTSE 100 companies aim to increase their dividends year after year, as profits rise. Investors expect this, and vote with their feet if management is unable to increase shareholder payouts regularly.
So while my shares are compounding in number, the dividends I receive are compounding in value, too. Soon I should be getting a much higher yield, based on the original sum I invested. If the share price rises as well, then it’s win-win-win.
Naturally, this virtuous cycle is not guaranteed — nothing is, when investing in shares. Dividends can be scrapped or suspended at any time. Share prices can crash or go nowhere for years. In extreme scenarios, a company can go out of business.
Nobody ever said that investing is a one-way bet. Or if they did, they lied. That’s why I hedge my bets, by putting together a balanced blend of FTSE 100 stocks. The winners will hopefully more than make up for any losers. I also invest with a lengthy timeframe, say, 20 years or more. That gives me time to bounce back from any share price crash or period of underperformance.
I further try to swing the odds in my favour by investing in strong, steady companies with healthy balance sheets, loyal customers, attractive dividend policies and a defensive ‘moat’ against existing rivals and new entrants.
There’s value on the index
Another thing I like to do is buy FTSE 100 shares when they are dirt-cheap, as I believe they are today. There are a host of companies on the index trading at less than 10 times earnings, where 15 is traditionally seen as fair value.
This reflects the fact that investors are nervous right now as the global economy stands on the brink of recession, and profits are under pressure. Effectively, markets are pricing in tomorrow’s troubles, which encourages me to carry on buying today.
The sooner I buy FTSE 100 shares, the sooner I start receiving their dividends, and benefit from the virtual circle I have described above. That’s why I’m still buying shares now, even though I’m as worried about the state of the world as the next person.
I’m building my portfolio of FTSE 100 shares to generate income in retirement. Already, I can beat that 4.12% average yield by plucking out individual companies that yield 8%, 9%, 10% or more. If I choose well and hold for the long term, those yields will rise even more dramatically.