60 Saturday June 11 2022 | the timesMoney
UK market is fertile hunting ground.
The Vanguard FTSE 100 ETF offers a
dividend yield of 3.35 per cent, versus
1.25 per cent for the Vanguard S&P 500
ETF.
The performance of the FTSE 100
index of leading UK firms has been a
perennial disappointment: it is up just
8.7 per cent since 2000. However, if you
had reinvested dividends received from
those firms you would have made a
return of 142 per cent.
Banks, which tend to become more
profitable when interest rates are
rising because their net interest margin
(the interest they receive on their
investments minus the interest they
pay their customers) rises, are also
worth a look.
Andrew Koch from Legal & General
Investment Management likes Nat-
West, which yields 4.5 per cent. Koch
thinks the firm can increase its divi-
dend because of these expected higher
profits.
Oil producers and defence compa-
nies have performed well so far this
year, but David Cumming from BNY
Mellon Investment Management
thinks that Shell and BAE SystemsSource: Morningstar Directc g c£180160140120100806040200Return on £1,000 000sMSCI World
MSCI World High
Dividend YieldComparing returns
1980 90 00 10 2020E
very month Matt Roberts
buys three shares in the
iShares Core S&P 500
exchange traded fund (ETF)
and two shares in the Van-
guard FTSE All-World Index ETF for
his stocks and shares Isa.
This gives him “instant diversifica-tion” for his portfolio — his number one
objective. Exchange traded funds are
listed on the stock exchange as compa-
nies in their own right and use a com-
puter algorithm to replicate the return
of a popular stock index such as the
S&P 500 and FTSE 100.
Once he has done that, Roberts, 32,Share prices are stuttering. Here’s
who works as a medical research scien-
tist, looks through his Excel spread-
sheet to find out which companies have
paid him the highest dividends relative
to the amount he has invested and buys
more of their shares. These tend to be in
businesses such as the oil giants BP and
Shell and consumer goods brand own-
ers Unilever and Procter & Gamble.
The second objective of the Isa,
which he holds with the platform Free-
trade, is to provide him with a second
revenue stream. The plan for this is to
supplement his salary and, ultimately,
to boost his retirement income.You should make companies that pay a regular
dividend the backbone of your portfolio if you
want long-term returns, says David Brenchley
He also hopes that these dividend-
paying firms will help him beat the piti-
ful 0.1 per cent interest that his £15,000
worth of savings were generating in his
current account three years ago.
Roberts, originally from Manchester
but living in Loughborough, is thankful
that, unlike his friends, he resisted the
temptation of the meme-stock phe-
nomenon where an army of individual
traders worked together to suddenly
push up the price of businesses such as
the gaming retailer GameStop and the
cinema chain AMC. Roberts’s portfolio,
now worth about £24,000, remains in
the green. His friends, on the other
hand, have now lost money.
We have become accustomed to see-
ing companies that pay dividends per-
form poorly relative to the wider stock
market. That’s because ever since the
global financial crisis the stock market
has been driven by large technology
companies that pay no, or very low,
dividends.
During the 2010s the MSCI World,
an index of the largest 1,539 businesses
in developed countries, delivered total
returns of 164.7 per cent, according to
the data provider FE fundinfo. That
compares with 143.9 per cent from the
MSCI World High Dividend Yield in-
dex, which is made up of 327 firms that
pay higher-than-average dividend
yields.
Historically, though, dividends drive
returns for investors. The high dividend
index beat the MSCI World’s return in
each of the three preceding decades.
Since November 1975 the MSCI World
High Dividend Yield index is up
17,401 per cent, versus a gain of 11,484
per cent for the MSCI World. On a
£1,000 lump sum investment that’s a
difference of £59,169.
The reason for this is what Albert
Einstein once reportedly called the
eighth wonder of the world: compound
interest. Reinvesting the dividends that
you receive compounds over the years
to ramp up your returns.
If you had a £100 investment in a
hypothetical company with a 5 per cent
dividend yield and a share price that
doesn’t go up or down, and you did not
reinvest your dividends, you would
have your £100 investment and £50
cash after five years and your £100 in-
vestment and £200 cash after 40 years.
If you did reinvest those dividends you
would have shares worth £162.89 after
five years and £704 after 40.
As interest rates rise, investors are
beginning to prefer the certainty of
dividends today, rather than potential
profit further down the line.
Funds investing in companies global-
ly with the aim of generating dividend
income had net inflows of £1.3 billion
between February and April 2022, ac-
cording to the Investment Association.
Funds investing in companies globally
without an income requirement had
net outflows of £328 million.
Kyle Caldwell from the investment
platform Interactive Investor said: “As
market volatility increases, so typicallydoes interest in dividend investments.
Income investments offer steady cash-
flow and also allow investors to partici-
pate in any gains in value the invest-
ment may enjoy.”
Global dividends are expected to be
more than $1.5 trillion in 2022 for the
first time, according to Janus Hender-
son Investors, a rise of 4.76 per cent
from 2021’s total. For those looking to
invest in dividend-paying stocks, the£173,900
return on £1k invested in the MSCI World
High Dividend Yield index in Nov 1975