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The secret to long-term investment returns 

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22/01/2019
The FTSE 100 is 35 years’ old this year, but – in spite of its reputation for stability – only 30 of the original companies are still in the index.

The remaining 70 have either been merged away, gone bankrupt or dropped out of the index after weak performance.

The stand-out performers over the long-term have all been dividend growth stalwarts, finds new research from AJ Bell, including ABF, Johnson Matthey, Legal & General and Whitbread. These companies have all grown their dividends for decades on end. Tesco, Pearson, Sainsbury and Unilever have all had good runs of dividend growth as well.

The best performer in the FTSE 100 since January 1984 has been tobacco group BAT, which has turned £100 into more than £33,000. This is 2.5x more than its closest rival Unilever. The worst? Royal Bank of Scotland, where a £100 investment would now be worth £290.

Russ Mould, investment director at AJ Bell, said: “Shrewd investors who had put £100 into each of the surviving FTSE 100 companies back in 1984 would today be sitting on a pot of £164,977, assuming income had been reinvested. But not all the companies were stellar picks.

“RBS was a classic example of why firms and management teams who focus on ‘growth’ should generally be avoided like the plague – especially if they acquire regularly. Growth is not a strategy, it is what results from strategy. As for the stand-out performers, a lot of them are dividend growth stalwarts – firms that had long spells of consecutives increases in their annual dividend.

“This shows how stock markets are get-rich-slow mechanisms when used properly and when they work well. They are not fruit machines. If you are picking individual stocks, focus on their competitive position, financial strength, management acumen and strategy. Dividend reinvestment is incredibly powerful because of compounding and how the maths of this builds up your savings pot over time. This means firms with fat yields can help – but be careful of stocks where supporting the fat dividend becomes a financial millstone for the company. There are few worse investments than an income stock where the dividend is cut, as the share price usually falls, adding capital pain to income insult.”

Mould points out that the market has consistently been subject to bull and bear markets: between 1998 and 2000, a technology, media or telecoms (TMT) stock was promoted to the index 25 times, while between 2000 and 2002, 22 tech stocks fell out of the index as the bubble burst. The index now gets just 1% of its market cap from technology. A similar phenomenon happened with financials in 2003-7.

 

FTSE 100: the 30 surviving original constituents
Company Share price at start Share price now1 Value of £100 invested (income reinvested) 2019 forecast dividend yield (%)
1 BAT* 45.05 2479 £33,123 8.5
2 Unilever 98.77 4143 £13,215 3.5
3 Whitbread 130.6 4601 £12,195 2.2
4 Reckitt Benckiser* 165.41 6023 £10,433 3.0
5 RELX* 47.44 1617 £10,229 2.8
6 Associated British Foods 72.23 2072 £7,471 2.2
7 Legal & General 16.14 230.2 £7,462 7.6
8 Rio Tinto* 194.32 3690.5 £7,075 5.7
9 GlaxoSmithKline* 87.75 1500.4 £6,578 5.3
10 Prudential* 87.91 1373 £6,483 4.1
11 Royal Dutch Shell* 219.64 2363.5 £6,178 5.9
12 Smith & Nephew 64.95 1429 £5,407 2.0
13 Sainsbury 114.72 261.5 £5,005 4.2
14 BP* 67.67 507.3 £4,130 6.4
15 Pearson 88.21 942.6 £3,739 2.2
16 BAE Systems* 56.35 464.9 £3,396 5.0
17 Johnson Matthey 254.86 2723 £2,991 3.3
18 Standard Chartered 88.26 606.4 £2,817 3.8
19 Tesco 17.61 191.55 £2,811 3.9
20 Edinburgh Investment Trust~ 96 609 £2,518 4.4
21 Barratt Development 108.12 462.2 £2,279 10.2
22 Elementis*~ 53.29 183.2 £1,625 3.8
23 Barclays 41.74 150.68 £1,537 5.3
24 Aviva* 169.86 372.1 £1,434 9.1
25 Land Securities 243.13 799 £1,421 6.1
26 Rank~ 68.82 140 £918 5.8
27 Marks & Spencer 107.97 248 £884 7.5
28 RSA* 317.33 508.8 £861 6.0
29 Hammerson~ 228.33 322.4 £474 4.3
30 Royal Bank of Scotland 216.88 216.6 £290 6.0
Source: Datastream/Sharepad/AJ Bell. 1Data to 2/1/19 * Denotes company that was previously listed under a different name. ~ Denotes company that has fallen into the FTSE 250

 

 

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