Getting paid money for holding a stock is a good way for investors to make some passive income. As a result, FTSE 100 dividend stocks have always been a popular choice of investment. However, with the economic situation at the moment and other factors, I feel there’s a lot more interest in dividend stocks than there was during the pandemic. Here’s why.
The pressure of inflation
UK inflation is running at 10.1%. It has been above 10% since August last year. It erodes the value of cash in the bank, forcing people to try and find ways to offset this impact. One way is by investing in a dividend stock. From using the dividend per share and the current share price, an investor can calculate a dividend yield as a percentage.
For example, the M&G dividend yield is 9.6%. There are no guarantees that future dividends will stay the same. But let’s assume that they do for M&G over the next year. In that scenario, the investor would make 9.6%, but would have to subtract the rate of inflation to reach a real net return.
Even though this might be positive or negative, it certainly helps to offset some of the inflationary pressure on holding cash. That’s why a lot of people are talking about it right now.
Generous yields on offer
This leads on to the key reason for heightened interest — some of the yields that investors can enjoy. The base interest rate is 4.25%, so it doesn’t really make sense to invest in a stock with a lower yield than this.
But what about Legal & General, with the insurance company having a current yield (8.5%) of double the base interest rate? Sure, it’s a higher risk as the capital invested could lose value if the share price falls. But I feel that the boosted return compensates investors fairly for the added risk of buying the stock.
Naturally, not all stocks make sense from this perspective. Yet that’s why a lot of chatter and research goes on, to help sift through companies to find the best dividend stocks.
Investing for the long term
Finally, shrewd people know how to benefit from compounding returns. A dividend paid today is great, but reinvesting that dividend and future ones can help to build a much larger income further down the line.
I feel a lot more people are now focused on planning financially for the future due to the difficult economic situation we’ve been in recently. The concept of building up to having a steady stream of income is becoming more and more appealing.
Don’t get me wrong, it isn’t easy. Dividends fluctuate based on company performance. Unlike a cash savings account, the money invested is also at risk if the share price underperforms. Yet the upside potential is there, offering attractive returns.
The post Why is everyone talking about FTSE 100 dividend stocks? appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.