As I explained on Monday, my family will soon receive a considerable windfall. I estimate this pleasant surprise to be around £300,000 after tax. This sum will arrive after the 2021/22 tax year begins on 5 April. As we don’t need this money right now, my wife and I plan to invest it to generate dividend income and future capital gains. The majority will be invested in high-quality FTSE 100 shares.
Why buy FTSE 100 stocks?
We will build this new £300k portfolio around large-cap FTSE 100 firms. Why? Because everywhere else I look, I see bubbly markets and frothy prices. Indeed, US stocks look fully priced and tech stocks resemble the euphoria of late 1999. I’d rather play safe than buy into irrationally exuberant valuations.
To young investors and day traders, buying shares in boring FTSE 100 businesses may sound unexciting. But almost 35 years of investing have taught me that boring is good. Boring works. Boring makes me richer. I know many fellow investors who have made multi-millions from long-term, patient investing. But I’ve hardly met any day traders who traded their way to real wealth. In short, experience has taught me that owning great businesses often produces outstanding returns. I just need to buy the right shares at the right price.
The Footsie’s top 12
Given the euphoria in US markets right now, I think bigger is better. When the market takes its next downturn, I’d rather own big, beautiful businesses than smaller, riskier companies. That’s why I’m looking to FTSE 100 heavyweights to generate an additional £12,000 a year of passive income. At Tuesday’s close, these 12 Footsie companies had the largest market values:
- Unilever £117.4bn
- AstraZeneca £103.7bn
- HSBC Holdings £81.1bn
- Rio Tinto £73.3bn
- GlaxoSmithKline £70.7bn
- Diageo £67.7bn
- British American Tobacco £62.9bn
- BP £57.1bn
- Royal Dutch Shell A £56.6bn
- Royal Dutch Shell B £48.9bn
- Reckitt Benckiser £46.7bn
- BHP Group £44.2bn
Which share would I buy today?
I’d happily become a shareholder in any of these 12 FTSE 100 Goliaths. Each company is a leader in its field, generating huge revenues, profits and cash flows. These can then be handed over to shareholders in the form of cash dividends, special payouts and share buybacks. But some of them are facing major challenges at present. So, the one share I would buy today is GlaxoSmithKline (LSE: GSK), for it’s what I call a ‘BBC share’. BBC stands for Big, Beautiful and Cautious — which exactly describes the sort of businesses that I want to own.
For the record, I’ve been a GSK shareholder for almost 30 years. Hence, I know this business very well — and I also saw GSK shares having a terrible 2020. Over the past 12 months, they have dived by almost a quarter (22.7%), making them among the cheapest they’ve been for five years. Their share price recovery may not come quickly, but as a bargain-hunter, I do think this FTSE 100 giant is underpriced today.
On Tuesday, the GSK share price closed just short of 1,410p, valuing this pharma behemoth at £70.7bn. At this price, GSK shares trade on a modest price-to-earnings ratio of 11.1 and a chunky earnings yield of 9%. What’s more, the cash dividend of 80p a share equates to a dividend yield of 5.7%, covered almost 1.6 times by earnings. For me, this is plainly too cheap, so I plan to add more GSK shares to my existing holding as soon as possible!
