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Investing within the FTSE 100 index has historically been a well-liked alternative for passive revenue seekers. Nevertheless, in recent times, Britain’s main benchmark has fallen out of favour.
That is likely to be unsurprising contemplating the FTSE 100 trailed the S&P 500 by a major margin over the previous decade. Whereas the Footsie superior simply 12% since January 2014, America’s flagship index delivered a 160% acquire.
Nonetheless, regardless of its current underperformance, I consider there are good causes for dividend traders to present FTSE 100 shares critical consideration at present. Right here’s why.
Low cost valuations
First, UK shares look fairly low cost proper now in comparison with their historic valuations.
Primarily based on metrics resembling price-to-earnings (P/E) ratios and price-to-book (P/B) ratios, FTSE 100 shares at the moment commerce close to the underside of their 30-year vary, not to mention the previous decade!
What’s extra, in comparison with abroad shares, the Footsie seems to be undervalued in relative phrases. The beneath desk neatly demonstrates this.
| Index | P/E ratio |
|---|---|
| S&P 500 | 23 |
| FTSE All-World | 16 |
| FTSE 100 | 9.5 |
Excessive dividends
Second, an additional standout characteristic of the FTSE 100 is the notable focus of dividend heavyweights amongst its constituents. Presently, the index yields a wholesome 3.8%.
Many Footsie corporations are well-established companies with lengthy monitor data of profitability and delivering passive revenue. These embrace commodity giants, banks, insurance coverage corporations, and telecoms titans.
There’s an absence of tech shares, which characteristic closely amongst America’s largest corporations measured by market cap. These corporations usually pay small dividends, or don’t present any shareholder payouts in any respect.
Presently, the FTSE 100’s passive revenue prospects look significantly sturdy. Final 12 months’s complete of extraordinary dividends, particular dividends and share buybacks amounted to a whopping £137.2bn. Crushed solely marginally by 2022’s document determine of £137.6bn, that equated to a chunky money yield of 6.9%.
Particular person shares
Third, past the index as an entire, there’s advantage in contemplating particular person FTSE 100 shares for a passive revenue portfolio too. A great instance is likely to be British American Tobacco (LSE:BATS).
The cigarette colossus at the moment trades close to lows final seen in 2011. It additionally occurs to be one of many Footsie’s main dividend stars, boasting a mammoth 9.8% yield.
Granted, there are appreciable dangers that include investing in ‘big tobacco’. Many analysts consider it’s a sundown trade and it’s no secret that governments world wide wish to scale back smoking charges.
Nevertheless, British American Tobacco is a cash-generating behemoth with a loyal buyer base and a rising portfolio of ‘alternative’ nicotine merchandise.
That’s sufficient to appease my fears. The inventory kinds an vital a part of my passive revenue portfolio and I’m grateful for the bumper payouts I obtain from my funding within the firm.
Threat administration
Whereas I consider the case for contemplating FTSE 100 shares as passive revenue investments is particularly sturdy at present, it’s important to keep in mind that dividends aren’t assured and capital development is vital too.
Accordingly, I diversify my inventory market investments throughout totally different geographies and sectors. I additionally maintain mounted revenue property, resembling gilts, which assist to scale back my portfolio’s volatility.
Having a reputable danger administration technique in place offers me confidence to place my spare money to work by loading up on low cost FTSE 100 dividend shares this 12 months.
