I’m loading up on dirt cheap FTSE 100 shares before the next stock market rally

·3-min read
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FTSE 100 shares have had a decent start to the year, rising just under 5% so far in 2023. Measured over 12 months, they are up 4.09%, despite all the global economic and political turbulence filling the headlines.

Investors will also have got dividend income on top, and the FTSE 100 generates one of the highest yields in the world.

In 2022, it generated an average yield of 4.2%, according to AJ Bell, well above the S&P 500‘s 1.78% yield. That pushed the FTSE 100’s total 12-month return past 8%.

Dividend income and capital growth

I prefer to buy individual FTSE 100 stocks, in the hope of generating yields of 7%, or more. This is riskier than buying the entire index, although I aim to reduce this by purchasing a diversified spread of at least a dozen companies. That way if one or two flop, my winners will hopefully compensate.

Another benefit of buying individual stocks is that I can target bargain stocks trading at dirt cheap valuations, that I reckon have recovery potential. This boosts my chances of outperforming the wider index although, again, it ups the risk.

Despite recent growth, which saw the FTSE 100 creep over 8,000 for the first time in February, it still looks cheap, according to fund platform Bestinvest. It says a lot of bad news is already priced into UK equities, including sticky inflation and a potential global recession.

UK shares are at low multiples compared to the rest of the world and longer-term trend, it says. The FTSE 100 now trades at 10.8 times 12-month forecast earnings, a deep discount to the MSCI World Index, which is on 15.6 times.

Some individual UK blue-chips are even cheaper than that, while delivering generous yields too. Real estate investment trust British Land Company trades at just 3.9 times earnings, but currently generates income of 5.48% a year.

There are bargains out there

Barclays trades at 5.2 times earnings and has a forecast yield of 5.3%. Housebuilder Barratt Developments trades at six times earnings and yields 7.38%. Mining giant Anglo American trades at 6.2 times earnings and yields 6.44%. I could go on…

Just because a company looks cheap doesn’t make it a good investment. It usually means the share price has been hit by bad news, which could be anything from falling profits to wider macroeconomic worries. There is no guarantee that it will recover, especially in the short run.

That’s why I buy bargain-priced shares for the long term, by which I mean between five and 25 years. That gives them plenty of time to recover and for my reinvested dividends to compound and grow.

I can’t say when the next stock market rally will arrive. Nobody can, even if some pretend otherwise. There are just too many variables. Typically, bull markets come out of the blue.

My strategy is therefore simple. Buy stocks that I think look cheap today. Target higher, sustainable yields and reinvest every penny. Diversify to reduce risk. Then wait for that bull run.

It will come, given time. And when it does, my portfolio will be ready.

The post I’m loading up on dirt cheap FTSE 100 shares before the next stock market rally appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and British Land 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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