The return of useful interest rates on cash savings has provided an additional choice for income-seeking investors.
But despite the 4%+ risk-free rates available today, I think that an equity income strategy is likely to remain a better choice for investors seeking income and long-term capital growth:
FTSE 100 | Total return (capital+divis) | Annualised TR |
Last 5 years | 34% | 6% |
Last 20 years | 366% | 8% |
Date: 14/10/24
The impact of compounding means that an investment made at 8% will be worth more than double an investment at 4% after 20 years:
£10,000 invested at 8% would be worth £46,609 after 20 years
£10,000 invested at 4% would be worth just £21,911 after 20 years
Inflation is another factor to consider. With UK inflation still running at around 3%, cash savings at 4% aren’t technically falling in value. But they’re not growing much, either.
I reckon that owning a selection of FTSE 100 shares with above-average dividend yields could be a simple and relatively hassle-free way to invest in UK equity and generate a competitive level of income.
The FTSE 100’s recent gains (14% in the last year) have pushed the index’s average dividend yield down to 3.6%.
However, significantly higher yields are available from individual stocks in the index. At the time of writing, the FTSE 100 contains 40 stocks with dividend yields over 4%.
In the remainder of this article, I’ll take a look at a simple high yield strategy that has been outperforming and currently offers a 7% average dividend yield.
Should we take a fresh look at the Dividend Dogs?
The Dividend Dogs strategy is based on a famous approach by US investor Michael O’Higgins in his book Beating the Dow.
The strategy simply involves selecting the 10 highest-yielding shares from a big cap index and rebalancing them annually.
In essence, it’s a contrarian strategy. The idea is that the investor is buying shares in mature, successful companies that are likely to be able to survive any temporary headwinds that have depressed their share prices. Over time, many should re-rate to more average valuations.
The Dividend Dogs of the FTSE 100 is one of the income strategies available in Stockopedia’s Guru Screens.
At first glance, the performance of this strategy since its…
