No one can predict the future
Turn on CNBC, Bloomberg, or one of the other business shows on TV and you’ll be bombarded with news about which shares are going up, which are dropping and when the next crash is due. The laughably sincere talking heads will explain exactly why the market is doing what it is doing at any given point in time with such authority that you may be tempted to believe that they actually can predict the future. In reality, they have no more idea than the next man.
The impression given is of a complicated — and very exciting — casino where its easy to make money…if only you could predict which shares are about to shoot up in value.
Much of the press fixates on this view of stock investing. They constantly speculate on which stocks are going to the moon next. Which is the next Beyond Meat — as if this is the only way to make money from shares.
It’s easy to be seduced by this view of share investing. It’s often the first thing that people think of when you say that you invest in shares.
The harsh truth is though, it’s very hard to make money consistently with this approach.
Indeed, even professional fund managers seldom beat their indexes over extended periods.
“the professionals…don’t know how to get a better result”
Warren Buffett, the legendary investor from Omaha, recommends that ordinary investors simply stick with a simple index-tracking fund rather than one run by a manager. Because, as he says, “the professionals, after fees, don’t know how to get a better result.”. So, what chance has a regular investor got of predicting the future?
And if your main aim is to generate an income from your investments, the other issue with simply buying and selling shares is that it’s actually a difficult way to generate a regular income. Let me explain.
Whereas you require money on a regular basis to pay the bills, shares may not show an increase in value for an extended period (if at all). It’s not really practical to sell part of your holding every time that you need to pay the electricity bill.
Having said that, plenty of folks do try and generate an income from trading. Good luck to them.
But, assuming you are not the gambling type,
there is a far more predictable way to generate money from shares, and that is to simply collect the dividends.
The real reason to own shares
If you fixate on the lines on a stock chart to make your investment decisions, it’s easy to forget that owning stock actually means you own a share of the company and are entitled to a share of its profits.
That’s what a dividend is – a regular payment to shareholders representing their portion of the company’s profits.
Now, of course, there is no guarantee that a dividend will be paid, but if you pick the right company, there is every likelihood that they will maintain their regular payments. The amount of the dividend can usually be accurately estimated, and it will often grow over time.
It is certainly way more predictable than trying to pick the future price direction of a given stock. And it’s a great way for income-seekers to generate the regular payments they require as well as for younger investors who can simply plough their dividends back into the pot and allow the wonders of compounding to do its thing.
In fact, it may surprise you to know, that many studies have concluded that dividends provide an outsize portion of stock market returns over long periods.
And the great news is that the FTSE 100 contains many world-class companies with excellent dividend yields. At the moment, the weighted average forecast yield on the entire index is 4.5% and it’s quite possible to build a diversified portfolio with a yield north of 5% or even higher.
The advantage of this approach is its simplicity. You simply buy a portfolio of dividend-yielding shares, sit back and wait for your dividends to roll in two or four times a year.
Of course, you are still at the mercy of the stock market. Dividend-paying stocks tend to be less volatile than ‘growth’ stocks, but they can still drop in value.
The trick is to remember that you are making your money from the dividends paid out by the companies. Not necessarily from any increase in the share price. Unless the company in question is going to hell in a hand cart, you can sit back and ride out the downswings whilst still enjoying your dividend income. In fact, if your savvy, this is often a great time to pick up some of your favourite stocks on the cheap.
And now may well be a great time to start investing in domestic shares. Whilst the property market is looking decidedly toppy, the FTSE 100 is trading at a discount to many of its international peers. Using the popular Cyclically Adjusted Price Earnings (CAPE) ratio as a measure, Japan is trading on a multiple of 22.4, Germany on 18.9, France on 22.6, the US on an expensive 31.1 and the UK market is trading at a bargain-basement 16.5.
Dividends are a great choice
So, I hope you can see why investing in high-yielding FTSE 100 shares for their dividends is a great choice for both income seekers and those looking to compound their income over several decades.
Many in the financial industry like to pretend that they can predict the future. That the only way to make money from shares is to apply the latest shiny strategy and watch the profits roll in week after week.
Strangely enough, if you have ever actually tried this, you’ll realise it’s a hell of a lot harder than advertised. Unless your name is Nostradamus, I doubt very much that you — or anyone else — can consistently predict the future. And that’s exactly what this type of investing requires.
The alternative is to simply view shares as exactly what they are, ownership of a small slice of a company. As an owner of that company, you get to share in its profits. You don’t really care what other people think the company is worth — its share price — as long as you keep receiving your portion of the profits via your dividends.
Indeed, a certain John D. Rockefeller – who knew a thing or two about investing – once said: “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in”.
And if it was good enough for John…