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I own a few FTSE 100 shares with sweet fruits. British American cigars, Legal & Generalagain IM&G (LSE: MNG) all offer a dividend yield of more than 8% currently, for example.
But that is more than double the current average of shares in the flagship blue-chip index of British shares.
So, should I stick with the average – or find stocks that offer exceptional yields?
Assignments – and more
Of course, the prospect of earning £8 or more each year for every £100 I invest today is attractive.
Not only do those three stocks yield more than 8%, but none of them have cut their dividends in recent years.
However, when it comes to price movements, things look less rosy.
Over the past five years, the FTSE 100 index has increased by 11%. The British American stock price rose less than 1% during that period. Legal and General and M&G were down 21% and 12%. Oops (thanks for the benefits along the way, though)!
Limited growth opportunities?
In a sense, that may not be surprising. Mature companies tend to pay good dividends when there are no growth opportunities to use their spare cash.
But while I think that’s a fair description of British American, both Legal & General and M&G operate in a high-demand industry that I think is likely to grow over time.
So, what should I do?
The power of integration
Perhaps the answer is “nothing“.
By simply holding on to my stocks – and reinvesting the gains – I hope I can do better financially.
With an average FTSE 100 yield of 3.6% at the moment, if I compounded £10,000 at that rate for 20 years, I would end up with a portfolio worth more than double that amount.
It’s not bad. But what if I compounded my £10k at 10%, the current M&G yield? After the same time, my share should be worth over £67,000.
Making wise decisions
Actually, how things will go in the future is unknown.
Yes, M&G benefits from operating in a high-demand, strong market. Yes, its robust form helps it meet that demand. Yes, its expertise in asset management helps the company differentiate itself from upstarts.
But what if the poor performance of its asset managers leads to customers withdrawing funds? We have seen such exits from M&G too often and in the long run, it is detrimental to profitability.
Still, I’m happy to own M&G shares as part of a diversified portfolio. In doing so, I aim to not just beat but smash the FTSE 100 yield curve.
Does that matter? If it means I can move toward my financial goals faster, I think the answer is yes.”yes“!
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