The FTSE 100 has had a bumpy ride this millennium, failing to repeat the fabulous bull runs of the 1980s and 1990s. Yet it’s done a lot more to make investors rich than the headline figures suggest.

At the time of writing, the index trades around 7,627. That’s only 1,000 points higher than its closing price on Millennium Eve, 31 December 1999, when it closed at 6,931. Yet investors have still made a handsome return in that time, once dividends are included.

The power of dividends

Over the next 20 years to 31 December 2019, the FTSE 100 climbed 612 points to 7,542, a rise of just 8.83%. But with all dividends reinvested, the total return was 122%. 

Global shares crashed in March 2000 when the tech boom imploded. The lead index bottomed out at 3,567 on 31 January 2003. It has more than doubled since.

If I’d invested £10,000 in a FTSE 100 tracker exactly 20 years today, I’d have generated an average total return of 6.89% a year and have a meaty £37,909.

These calculations tell me three things. First, they reveal the staggering power of reinvested dividends over the longer run. They allow investors to benefit from compound interest, a force physicist Albert Einstein called the “eighth wonder of the world”.

Second, they show the best time to buy shares is in a stock market dip, when they’re cheaper. With the FTSE 100 sliding in recent months, we may have a buying opportunity today.

The third thing they reveal is that by buying and holding for the long-term, FTSE 100 investors can still make money even if the index appears to go nowhere. Even those who put all their money in the market at its peak on Millennium Eve made a nice profit.

I’m buying individual shares

In practice, nobody will have invested all their money either in December 1999 or March 2003, but steadily over many years. Nearly all would made a pretty decent return, provided they had held for the long term and reinvested their dividends.

Personally, I prefer to buy individual FTSE 100 stocks in a bid to generate an index-beating return. Right now, I’m focusing on dirt cheap dividend stocks, many of which yield 7% a year or more. If I get any share price growth on top, I should be well ahead.

Recent purchases include Lloyds Banking Group, which is forecast to yield 6.14% this year, mining giant Rio Tinto, which yields 7.75%, and insurer Legal & General Group ( 8.27%). Their low valuations are also a thing of wonder, as they trade at P/Es of 6.26, 7.1 and 5.9 times earnings respectively (where 15 typically equals fair value).

Buying individual shares is riskier than a tracker, and dividends are never guaranteed. They can be cut or scrapped at any time. To reduce the potential damage, I would build a portfolio of at least a dozen stocks with different risk profiles from different sectors.

Then I would do the wisest thing any investor can do, and give my reinvested dividends time to compound and grow. Another 20 years at least, I’d say.

The post If I’d bought a FTSE 100 tracker 20 years ago here’s what I’d have now appeared first on The Motley Fool UK.

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Harvey Jones has positions in Legal & General Group Plc, Lloyds Banking Group Plc, and Rio Tinto Group. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.

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