The FTSE 100 is London’s leading stock market index. It includes 100 of the largest UK-listed companies, with this list rebalancing every quarter. Many of these companies are household names with markets spanning the globe. Together, these Footsie firms are worth over £2.4trn, with their individual market values ranging from £3.2bn to £232.8bn.

Read on to learn two hidden secrets behind the FTSE 100’s triumph!

Fabulous FTSE

The FTSE 100 (FTSE is short for Financial Times Stock Exchange) — launched in January 1984, priced at 1,000 points. It began actively trading in April 1984, shortly after my 16th birthday. I remember the fanfare at the time as TV stations and newspapers celebrated this financial leap forward.

As I write, the index stands at 10,497.30 points — around 10.5 times its starting level in 42 years. That works out to a compound growth rate of nearly 5.8% a year. To me, this hardly seems a decent return for the risks of investing in volatile shares. However, there’s something important missing from this analysis.

Delicious dividends

Dividends are cash payments — usually regular, but sometimes one-offs — paid by companies to their shareholder owners. While most listed businesses don’t pay dividends, almost all FTSE 100 firms do. However, future dividends are not guaranteed, so they can be cut or cancelled. This happened often during the Covid-19 crisis of 2020/21 (the pandemic now seems like a fever dream to me!).

This year, Footsie companies are expected to pay out £88bn in dividends. I’m a huge fan of this ‘free money’, so my family portfolio owns at least 25 FTSE 100 and FTSE 250 shares.

During times of crisis and major stock market crashes, the Footsie’s dividend yield has surged as high as 8% a year. Currently, after strong gains for the index, this cash yield is around 3% a year. As an added bonus, many companies keep raising their dividends year after year.

Buyback boost

Another boost for FTSE 100 investors comes from share buybacks, when companies use their cash reserves to purchase (and usually cancel) their own shares. This reduces their share bases, lifting future returns for patient shareholders.

A dividend dynamo

For example, my family owns shares in Standard Life (LSE: SDLF) — formerly Phoenix Group Holdings — largely for their juicy dividend yield. Standard Life is Britain’s leading provider of long-term savings and investment plans. It also buys and then runs off investment and pension funds from other firms.

The UK pension-transfer market is booming, boosting Standard Life’s share price close to all-time highs. As I write, it stands at 776.2p, valuing this retirement specialist at £7.8bn. The shares are up 33.5% over one year, but only 7.4% over five years (excluding dividends).

My family paid 544.4p a share for our stake in August 2023, so we are sitting on a paper profit of 42.6%. However, by reinvesting all our dividends to date, our achieved return is considerably higher.

Finally, Standard Life just agreed to buy rival Aegon UK for £2bn in cash and shares, gaining 3.7m customers. If this deal goes bad, then it could harm the group’s future revenues, earnings, and cash flows. Even so, I hope to keep banking these delightful dividends!