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Here’s why the FTSE 100 is still my top choice for dividend income

One English pound placed on a graph to represent an economic down turn
Image source: Getty Images

The UK stock market might not be the best bet for finding high-flying growth stocks. But I think it could be perfect for those of us seeking dividend income.

I was considering this after reading some recent thoughts from Shell (LSE: SHEL) CEO Wael Sawan.

Speaking to Bloomberg, he was despairing of Shell’s low valution on the FTSE 100. He even speculated about dropping the firm’s London listing, in favour of a US market. And I can understand the feeling.

Oil stock valuations

Even after a recent price boost, the forecast Shell price-to-earnings (P/E) ratio is still down around nine. By contrast, the US-listed Exxon Mobil commands a P/E of 13.5, and that’s signficantly higher.

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But what’s actually wrong with a low P/E?

Well, for a CEO, it might suggest weakness. And a low valuation can leave a company vulnerable to takeover attempts. Not that I expect anyone to launch a bid for the £187bn Shell, mind.

What would Warren Buffett say?

But why does it matter to shareholders, especially when it’s a cash-generative stock paying good dividends? For that, I’ll hark back to what billionaire investor Warren Buffett once asked about beef.

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

The answer was obvious to him, and it seems obvious to me.

Shell dividends

If I wanted to keep buying Shell shares for dividend income, why would I want the price to rise? So that I’d have to pay more and get a lower yield when I bought more shares? That wouldn’t make any sense at all.

Speaking of yields, Exxon Mobil shareholders look set to pocket around 3.1% for the current year, with the Shell dividend yield up at 3.8%.

Shell’s might not be the biggest yield on the FTSE 100. But that extra 0.7% a year could make quite a difference, reinvested and compounded over the next couple of decades.

Index valuations

To see the difference more clearly, what about the index itself, compared to the S&P 500?

Valuation measures for the two indexes vary depending on who we listen to. But it looks like the FTSE 100 is on a P/E of about 11 now, with the S&P 500 up around 25.

The US index has an overall dividend yield of around 1.4%, against the Footsie’s 3.7%. That’s just one snapshot, and over the longer term I’d expect the two indexes to be a bit closer together.

US valuations

The US stock market, though, does traditionally command higher stock valuations than the UK. There are many ideas about why that’s the case. But it still seems strange to me, especially when most of the companies in the Footsie are just as global as their American counterparts.

But one thing does seem clear to me. The FTSE 100 looks like a much better place for me to invest my cash, in my search for the best long-term dividend yields I can find.

The post Here’s why the FTSE 100 is still my top choice for dividend income appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2024