FTSE 100’s Dividend Edge: A Rare Opportunity For U.S. Income Investors

Aerial View of the City of London skyline at dusk. London, UK.gettyFirstly, I need to tell U.S. investors, “This might be about the U,K., but pay attention because this applies to you.” It’s dull of me to keep harping on about the difference between the relative valuations of the U.S. and U.K. markets, and you can explain it in many narrative ways, or you can simply be millennial about it and say, “It is what it is,” but as investors we should instead say, “I smell money!”

So let’s look at a chart:

Chart comparing the performance of the U.K. FTSE 100 with the U.S. Dow JonesCredit: ADVFNIn the last 10 years, the Dow has outperformed the U.K. index by 100%. In a nutshell, the Dow has compounded by roughly 7% while the FTSE hasn’t compounded by much at all.

Should that be the case?

No – not if the dividend yield is a guide, because the dividend yield of the Dow is roughly half that of the FTSE 100. This suggests, in old-school thinking, that the FTSE’s long-term pricing values its dividends at half the price of the Dow’s. If you think of the FTSE in terms of income alone, the dividend yield should be half what it is, and the price should be double to match the level of the venerable Dow Jones.

Dividends have long since lost their position of investment primacy, but the logic of valuing a stock by its dividends still has currency, and such a divergence suggests that either the price of the high-priced one should fall, the price of the one with cheap dividends should rise, or both. However, before we muse on what to do, take a look at this:

MORE FOR YOUThe FTSE chart accelerating Credit: ADVFNI’m a fan of accelerating charts. Information flows like honey, so when a long-term trend kicks off, it takes time for it to get on a stable course. The “penny dropping” produces an acceleration, and then you see a rocket or a nosedive, with momentum driving the repricing. I’m tempted to see such an acceleration in the FTSE 100.

So for the U.S. income investor looking for a crack at the FTSE uplift, there is the iShare MSCI UK ETF, which throws off a 3.8% dividend, and for the Brit there is the Core FTSE 100 Tracker.

The FTSE is a dollar hedge, which is likely why it’s rallying. Interest rates down, dollar down – it’s that simple.

Of course, it’s no fun to invest in stodgy stocks when the bright lights of the MAG7 beckon. Look at that cheese on the wooden stage. That metal sculpture is pretty too– and oh that cheese is tempting, let’s go…