Does The FTSE Pass My Triple Yield Investment Test?

Is the FTSE 100 (LON:UKX) still a buy in today’s market? Roland Head puts the index to the test.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Pound Coins

Like most private investors, I drip-feed money into my investment account each month. To stay invested, I need to make regular purchases, regardless of the market’s latest gyrations.

However, the FTSE 100 (FTSEINDICES: ^FTSE) is up 75% on its March 2009 low, and is no longer cheap.

Should you invest £1,000 in Greggs Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Greggs Plc made the list?

See the 6 stocks

So is the UK’s blue-chip index still a buy, or do investors need to look elsewhere?

The triple yield test

Low interest rates mean that the stock market has become a popular choice for investors who want their savings to stay ahead of inflation.

To gauge the affordability of the market, I like to look at three key yield figures — the trailing dividend and earnings yields, and the forecast yield for the year ahead. I call this my triple yield test:

FTSE 100 Value
Current price 6,650
Earnings yield 5.8%
Trailing twelve month dividend yield 2.9%
FTSE 100 forecast yield 3.2%
Instant access cash savings rate 1.5%
UK 10yr govt bond yield 2.7%

The earnings yield is simply the inverse of the P/E ratio, and the FTSE’s earnings yield of 5.8% equates to a fairly high P/E of 17.2

However, analysts are predicting average earnings per share growth of 9% for FTSE 100 constituents over the next year, placing the index on a forecast P/E of 14.7, which isn’t expensive.

Strong earnings growth is expected to fuel a continued rise in dividend payouts, and the index currently trades on a forecast yield of 3.2%, more than double the interest available from a decent instant access savings account, and 0.5% more than 10 year gilt bonds.

FTSE 100 vs. the rest

To put the FTSE 100’s valuation into context, it’s worth looking at the UK stock market as a whole.

2014 Forecast UK Stock
Market
FTSE 100
P/E ratio 14.6 14.7
Earnings per share growth 13.5% 9.0%
Dividend yield 2.7% 3.2%

The figures above show that the UK’s biggest companies are expected to stay true to form, delivering slower earnings growth but higher incomes for shareholders, even though the FTSE 100 forecast P/E is almost exactly the same as the average P/E for the wider UK stock market.

Is the FTSE 100 a buy?

In my view, FTSE 100 tracker and exchange traded funds, such as the iShares FTSE 100 ETF (LSE: ISF), continue to offer an attractive level of income, relative to small cap stocks and government bonds.

However, the FTSE currently trades on a multiple of more than 17 times its members’ trailing earnings. This isn’t cheap, but the index’s 2.9% yield is above the current 2.0% rate of inflation, and if earnings grow as forecast in 2014, today’s FTSE 100 ‘price’ of 6,650 won’t look expensive at all in a year’s time.

Should you buy Greggs Plc now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland does not own shares in the iShares FTSE 100 ETF or ITV.

More on Investing Articles

Man smiling and working on laptop
Investing Articles

3 FTSE 250 shares with low P/E ratios and sky-high dividend yields!

Searching for the best bargains that London has to offer? Here's a handful from the FTSE 250 I think are…

Read more »

Investing Articles

Why is Apple stock lagging the S&P 500 in 2025?

Our writer is wondering whether now might be an opportune time to snap up shares of the largest company in…

Read more »

Investing Articles

Here’s how an ISA investor could build a £20k passive income with UK shares

Looking to make a five-figure passive income in retirement? Here's how a blend of UK shares and cash savings could…

Read more »

Investing Articles

£10,000 in savings? Here’s how an investor can target £3,560 in annual passive income

Paul Summers explains how an investor could target making thousands of pounds in passive income by holding great dividend stocks…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Up 490%, Lion Finance Group is a new name on the FTSE 250… but what is it?

Many investors won’t be familiar with Lion Finance Group, but the FTSE 250 stock has surged 490% over five years.…

Read more »

Growth Shares

I think this is the most punished FTSE stock in the market right now

Jon Smith talks through a FTSE company that has endured problems but is one he believes has a brighter future…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Stock market correction! 1 growth share down 53% to consider buying now

This writer highlights a growth stock that has hit a rough patch in recent weeks. Here's why it might be…

Read more »

Investing Articles

Here’s why the Tesco share price has dropped 18% in a month!

Tesco's share price has lost nearly a fifth of its value since mid-February. Is this FTSE 100 dividend stock now…

Read more »