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Is this the best chance to buy cheap FTSE 100 shares in a generation?

Image source: Getty Images
Image source: Getty Images

I buy FTSE 100 shares to try to build some long-term passive income. But how can stock market newcomers tell the best time to start?

I always say the best time is right now, today. I’ve never seen any good way to time the market. And none of the world’s top investors ever have either.

So start as soon as we can, invest as much as we can, and keep going for as long as we can.

Lucky start?

But if, by luck, we happen to start at a time when shares are especially cheap and dividends are unusually high? That can give us an extra boost.

I think we’re in that situation right now. Share valuations are low and dividend yields are high.

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But, first, a short tale of caution, about Vodafone (LSE: VOD). Vodafone shares have been on a long slow slide.

Broker forecasts suggest a middling price-to-earnings (P/E) ratio of 15, but that it will drop close to 10 by 2026 on good earnings growth expectations. That’s not high.

Dividend slashed

The price fall pushed the dividend yield up to 11%. So, a low share valuation and a huge dividend. Shouldn’t we long-term income investors pile in with every penny we can spare?

Well, in a long-awaited move, Vodafone has just halved its dividend, starting in 2025.

As it happens, the firm has long needed the kind of shakeup it’s getting now. And I rate it as a good (if a bit risky) buy now.

But it does caution us against just buying low value shares with the market’s biggest yields.

Cheap Footsie?

Still, I really do think those starting a Stocks and Shares ISA this year could get a nice start.

Estimates vary, but it seems the FTSE 100 is on an average P/E of about 12 now. Compared to a long-term value of around 15, that’s low.

Forecasts put the overall FTSE 100 dividend yield at 3.9% this year, and 4.2% next year. That’s relatively high, and there’s more.

Share buybacks are growing on top of that, and it looks like 2023 could turn out to have been a record year for them.

Which sectors?

I do see one risk, though. Forecast dividend growth is not well spread out, and seems to be concentrated in just a few sectors.

According to AJ Bell‘s Dividend Dashboard, banks are up there, with HSBC Holdings on for the biggest dividend rise in cash terms. Oil giants BP and Shell should post big rises too, as should British American Tobacco.

Perennial income favourite National Grid should also be in the top 10.

It’s tempting to go for the biggest dividend gains in the top sectors. But I think we need to be extra careful about diversification at times like this. I see it as an essential way to help keep risk down.

But, I do think this might just turn out to be the best year to get started that we’ll see for a long time.

The post Is this the best chance to buy cheap FTSE 100 shares in a generation? appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell Plc, British American Tobacco P.l.c., HSBC Holdings, and Vodafone Group Public. 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