Dividend investing is a very popular strategy among UK investors. I’m a huge fan myself, as there are many advantages of owning a portfolio of dividend stocks. Here’s a look at three reasons I’ll be buying more from the FTSE 100 for my portfolio in 2019.
High yields relative to cash savings One of the main attractions of FTSE 100 dividend stocks right now is the fantastic yields available, particularly when you compare these yields to the interest rates available from cash savings accounts.
For example, the highest interest rate you can pick up on a cash savings account in the UK at the moment is around 1.5% a year. That’s pretty abysmal. And while interest rates do appear to be heading up, realistically it could be years before we see decent interest rates on cash savings products that are above the rate of inflation.
In contrast, I can pick up yields of 5%, 6%, or even 7% from FTSE 100 dividend stocks at present, meaning I can earn a whole lot more income through stocks. Sure, dividend stocks are riskier than cash savings products, but when you’re looking at yields of up to 7% versus interest rates of just 1.5%, the risk is worth taking, in my view.
Easy money Another key reason I like dividend stock investing is it’s quite easy as the passive strategy doesn’t involve a lot of work.
For instance, we’re often told that stocks can provide returns of 7-10% per year on average over the long term. Yet with yields of 6-7% available from FTSE 100 stocks such as Legal & General Group (LON:LGEN), ITV (LON:ITV) and Imperial Brands (LON:IMB), I can pick up the bulk of that (in cash) from dividends alone.
This takes a lot of the stress out of investing, in my view, as I don’t need to worry about selling stocks on a regular basis to lock in gains.
Compounding power Finally, dividends also allow me to compound my wealth easily because I’m constantly earning income that can be reinvested. That’s a huge plus because compounding (earning a return on past returns) is the secret to generating wealth. Over time, money that’s compounding grows exponentially.
Moreover, dividend stocks allow me to compound my wealth even when market conditions are not optimal. Even if the FTSE 100 falls this year, I’ll still pick up a regular stream of dividends, and I’ll be able to reinvest these at lower prices, buying me even more stocks. In contrast, if I owned a portfolio of growth stocks, I’d probably have little to show for my efforts if the FTSE 100 falls.
So overall, I continue to see many advantages of owning dividend stocks right now. With some excellent yields available in the FTSE 100, I’ll be certainly looking to add to my portfolio this year.
Edward Sheldon owns shares in Legal & General Group, ITV, and Imperial Brands. The Motley Fool UK has recommended Imperial Brands and ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019