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I have quite a few FTSE 100 stocks with juicy returns. British American Tobacco, Legal and generaland M&G (LSE:MNG) all offer a dividend yield of over 8% at the moment, for example.
But that is more than double the current average of shares in the main British stock index.
So, should you turn to the average or look for stocks that offer exceptional performance?
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 stocks each yield more than 8%, but none of them have cut their dividend in recent years.
However, when it comes to price movement, things look less rosy.
In the last five years, the FTSE 100 index has risen 11%. British American's share price has risen less than 1% over that period. Legal and General and M&G are down 21% and 12%. Alas (though thanks for the dividends along the way)!
Limited growth opportunities?
In some ways, that might not be surprising. Mature companies often pay generous dividends in the absence of growth opportunities on which to spend excess cash.
But while I think that is a fair description of British American, both Legal & General and M&G operate in an industry with simply enormous demand which I believe can continue to grow over time.
So what should I do?
The power of capitalization
Maybe the answer is “nothing”.
By simply holding on to my shares (and reinvesting the dividends) I hope to be able to achieve very good financial performance.
With the average FTSE 100 yielding 3.6% at the moment, if you accumulated £10,000 at that level over 20 years, you'd end up with a portfolio worth more than double that amount.
Not bad. But what if I combined my £10,000 at 10%, M&G's current yield? After the same period, my shareholding should be valued at over £67,000.
Make smart decisions
In practice, it is unknown how things will develop in the future.
Yes, M&G benefits from operating in a market with large and resilient demand. Yes, its strong brand helps it tap into that demand. Yes, its asset management experience helps the company differentiate itself from startups.
But what if the weak performance of your asset managers leads to clients withdrawing funds? We have seen these types of exits from M&G frequently and, in the long term, they pose a risk to profitability.
Still, I'm happy to own M&G shares as part of a diversified portfolio. In doing this, I aim to not only outperform, but crush the average performance of the FTSE 100.
Does that matter? If that means I can move faster toward my financial goals, then I think the answer is a resounding “Yeah“!
