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Consistently investing each month in the UK’s top 100 companies has historically proven to be an excellent way to grow wealth. However, the FTSE 100 has seemingly gone nowhere in the last five years. In fact, versus September 2018, the index is up a grand total of just 2.6% – that’s not even in line with inflation before it began to surge.
To be fair, we have endured an extraordinary double downturn event in the Covid crash followed by last year’s correction. But with the FTSE 100 unmoved, is it better for investors to focus on other indices altogether?
Not necessarily. And the UK’s flagship index’s performance is actually far better than it would seem. Let’s take a closer look.
The hidden returns of the FTSE 100
When looking at an index chart, investors see the weighted average performance of all the constituents over a certain period. In other words, it’s the combined stock price movement of all the underlying companies.
However, this only encapsulates capital gains. And since the FTSE 100 is home almost exclusively to mature industry titans, share price growth isn’t as common as growth indices like the S&P 500 in the US. But maturity comes with two primary benefits to make up for the lack of capital gains – stability and dividends.
Despite all the recent volatility plaguing the financial markets, the index has managed to pull through relatively unscathed. And while the macroeconomic environment is far from ideal, most of these companies have managed to continue paying dividends throughout. In fact, some have even been hiking shareholder payouts.
When taking dividends received into account, the true total returns generated by the FTSE 100 over the last five years is actually closer to 26.9%. That’s 10 times more than the capital gains and goes to show the power of dividends when left to reinvest.
What’s next?
The index as a whole has managed to recover from last year’s correction. However, on closer inspection, it seems this recovery has been driven mainly by just a handful of companies. And many constituents have yet to make a comeback.
This suggests that some long-awaited capital gains could be on the horizon in the coming months. And when paired with dividends, the FTSE 100 could be on track to deliver some stellar performance as we move into 2024. So it’s hardly a surprise that the general consensus among analysts is to start buying.
I personally agree with this conclusion. However, there are still risk factors that must be considered. The near-term performance of this index remains unclear. And should the economy take a turn for the worse, stocks, even those unaffected by higher inflation and interest rates, could end up back in the gutter.
Therefore, when capitalising on the opportunities within the UK’s flagship index, I think a prudent approach is to adopt pound-cost-averaging to spread buying activity in case of further volatility. And that applies to both index investors and individual stock pickers.
