The FTSE 100 closed on 31 December at 6,930 points, on the cusp of a new century full of optimism. But FTSE 100 shares don’t seem to have been listening.
At the time of writing, the index stands at 7,410. In a bit over two decades, it’s gained just 6.9%. That’s a terrible performance.
Well, things aren’t really that bad. An investor who plonked down their £10,000 pot on the FTSE 100 on that fateful New Year’s eve would have more than doubled their money by today. And it’s all down to dividends.
A doubling over 22 years is still a relatively poor performance for UK shares. But it’s far from the disaster that the headline stock market performance makes it look.
And I think the future for dividends is now looking better than ever. If I had a £10,000 windfall today, I’d use it to invest in FTSE 100 shares for sure.
Market timing?
Now, I haven’t suddenly become an advocate of market timing. No, it’s all about value for me.
And I see signs that FTSE 100 shares are undervalued today. If that happens to coincide with a market low and share prices rise, that would be a bonus. I’d have got my timing right just by accident.
What makes me wish I could invest £10,000 in FTSE 100 shares right now? It’s three main things.
Dividends
Despite the gloom, FTSE 100 dividend forecasts are rising. We might even be on for new records for total dividend cash and share buybacks. Forecasts are currently only slightly behind the all-time record year of 2018, and there’s still time for further uplifts.
Even if 2022 doesn’t set a new record, it seems likely that dividends and buybacks will come very close. And that’s in a year of big cost-of-living increases, and inflationary pressures on company costs.
The overall FTSE 100 forecast suggests a yield of 4.2%, which is strong. And we even have a handful of shares on double-digit forecasts.
Valuations
I’m seeing a lot of low valuations on a price-to-earnings (P/E) ratio basis. The banks are my favourite examples.
Lloyds shares are on a forecast P/E of only around seven, with NatWest on a similar valuation. And the Barclays P/E is a fraction lower.
These bank valuations remain low despite all three having posted positive first-half results, and all offer strong dividend yields.
Sentiment
The financial headlines suggest there’s plenty of pessimism around. But it can be good to buy when everyone is negative.
We’ve seen bear markets for the S&P 500 and Nasdaq in the US. But there’ve been no similar falls here in the UK, where index valuations were quite a bit lower anyway.
Might it just be that investor sentiment is at rock bottom now? It reminds me of Warren Buffett’s urging to “be greedy when others are fearful“.
I might be completely wrong in my contrarian thoughts. And there must be a good chance that a weak economy could keep FTSE 100 shares in the doldrums for a while yet.
But I’m off to check down the back of the sofa in case there’s a spare ten grand there for me to invest.
