For most UK based investors the FTSE 100 index is almost certainly the most recognisable reference point for movements in investment markets. The almost mechanical reading of the day’s price movement on hourly news bulletins “and in financial markets the FTSE 100 was up 2 points at 7,654…” is so familiar it can pass by unnoticed. Perhaps one reason for this is that the number barely seems to change.
In fact, up until late 2016 the FTSE 100 had seemingly spent 20 years yo-yoing between 4,000 and 7,000 and anybody unfortunate enough to invest on the final day of 1999 (the very top of the tech bubble) would seemingly have just 11p extra for every £1 invested as the index moved from 6,930 (31/12/1999) to 7,687 (31/12/2017) an underwhelming return equivalent to just 0.58% a year for 17 years.
Of course what these numbers don’t reflect are dividends and the almost magical power of compound returns. When companies reach the size and maturity of those in the FTSE 100, one of the best things they can do with the value they create is to hand it back to their investors as dividends and this means that value is also removed from the price of the index. To demonstrate the power of recycling that value back into the market reconsider the unfortunate soul who entered the market on the eve of the new millennium. Had they re-invested all their dividends for the next seventeen years back into the market the annualised return jumps to over 4%, or £1.08 for every £1 invested. That’s more than double, or an implied index value of 14,345, all despite the worst possible market timing.
Power of Compounding FTSE 100 Dividends - 31/12/1999 to 31/12/2017 | ||
| | Dividends excluded | Dividends re-invested |
| Total Return | 10.93% | 107.59% |
| Annualised return | 0.58% | 4.14% |
| Value of £1000 | £1,109 | £2,076 |
Data from Thomson Reuters – 02/08/2018
Past performance of an index or company stock is not a guide to future performance. The value of an individual company stock or index of stocks, and any income derived from them, is not guaranteed; they can fall as well as rise and you may not get back some or all of the amount invested.
What does this mean for markets now and does the fact that the FTSE has stalled between 7,000-8,000 actually mean anything? Regular dividends means that even if the index doesn’t move a single dot investors should still receive between 3- 4% a year. This is simply the total dividends you expect to be paid out from the market as a whole divided by the price you pay for the index today. It’s also worth noting that this yield is close to double what it was at the height of the dot com bubble, i.e. you are getting more for your money now.
Fundamentally the movement in price of the FTSE 100 tells you in which direction stock prices are moving (up or down) but it’s a clumsy indicator of market value and, in isolation, the number itself (6,000, 7,000 or 10,000) means very little. On the other hand there is no perfect measure and while we don’t expect news correspondents to start quoting dividend yields in their daily bulletins investors should remember that the index level is just one small part of a much bigger picture.
Scott Osborne
Investment Analyst
