I own quite a few FTSE 100 shares with juicy yields. British American Tobacco, Legal & General, and M&G (LSE: MNG) all offer a dividend yield higher than 8% right now, for example.
But that is more than double the current average for shares in the flagship blue-chip index of British shares.
So, ought I to tack to the average – or find shares that offer an exceptional yield?
Dividends – and the rest
Of course, the prospect of earning £8 or more each year for every £100 I invest today is attractive.
Not only do those three shares each yield above 8%, but none has cut its dividend in recent years.
When it comes to price movement, though, things look less rosy.
Over the past five years, the FTSE 100 index has moved up 11%. The British American share price has climbed by under 1% during that period. Legal and General and M&G are down by 21% and 12%. Ouch (though, thanks for the dividends along the way)!
Limited growth opportunities?
In one sense, that might be unsurprising. Mature companies often pay generous dividends in the absence of growth opportunities on which to spend their spare cash.
But while I think that is a fairish description of British American, both Legal & General and M&G operate in an industry with simply enormous demand that I think may keep growing over time.
So, what should I do?
The power of compounding
Perhaps the answer is “nothing”.
Simply by hanging onto my shares – and reinvesting the dividends – I hope I could potentially do very well financially.
With an average FTSE 100 yield of 3.6% right now, if I compounded £10,000 at that level for 20 years, I would end up with a portfolio valued at more than twice that amount.
Not bad. But what if I compounded my £10k at 10%, the current M&G yield? After the same period of time, my shareholding ought to be worth over £67,000.
Making smart choices
In practice, how things will turn out in future is unknown.
Yes, M&G benefits from operating in a market with large, resilient demand. Yes, its strong brand helps it tap into that demand. Yes, its expertise in asset management helps the firm set itself apart from upstarts.
But what if weak performance by its asset managers leads to clients withdrawing funds? We have seen such outflows from M&G often and in the long term, they are a risk to profitability.
Still, I am happy to own M&G shares as part of a diversified portfolio. By doing that, I aim not just to beat but to smash the average FTSE 100 yield.
Does that matter? If it means I can move towards my financial goals faster, then I think the answer is a resounding “yes“!
The post FTSE 100 shares yield under 4%. Here’s why that matters! appeared first on The Motley Fool UK.
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More reading
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£5k in savings? Here’s how I’d aim to build a rising passive income of £5,500 a month
C Ruane has positions in British American Tobacco P.l.c., Legal & General Group Plc, and M&g Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. and M&g Plc. 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.
