FTSE 100 stocks form the core of my portfolio. But it hasn’t been a great year for the index. Unfortunately, most UK stocks are now trading at discounts, while surging resource stocks have pulled the FTSE 100 upwards.
This is especially the case in certain sectors like housebuilding, travel and retail. Banks have also suffered. However, I’m an opportunist. And sliding share prices have certainly created opportunities.
So with 2023 fast approaching, I’m looking closely at fallen FTSE 100 stocks to supercharge my portfolio in the coming years.
Buying in the dip
Historical data suggests that the trend of the FTSE 100 and other indexes is upwards. The lead index is approximately four times bigger today than it was 35 years ago.
So, as a long-term investor, the entry point isn’t my biggest concern. I just need to be confident that I’m making a sensible and well-informed investment decisions.
However, buying during dips can propel my portfolio forward when the market truly recovers. And it can also help me limit the risk of losses.
Why buy now?
Why should I buy now? Well, it’s not just about buying low and selling high. There’s also the matter of the dividend yield.
If I’m looking at dividend stocks, which I usually am, the share price makes a big difference. When share prices fall, and the dividend payout remains constant, dividend yields go upwards.
And, of course, this works the other way too. When share prices rise, and the dividend payout remains constant, dividend yields dip.
So buying when share prices are low can help me increase my passive income generation through dividend payments. After all, it’s important to remember that my dividend yield is always relevant to the price I pay for that stock.
However, it’s equally vital to recognise that when dividend yields get extremely high, they’re likely a warning sign. Over the past year, the Persimmon dividend yield moved upwards from around 10% to nearly 20% as the share price halved. Perhaps, unsurprisingly, the dividend has now been cut.
Sensible picks
Just because a stock is cheaper than it was a year ago, it doesn’t mean it’s a good buy for my portfolio. Stocks are often cheap for a reason. The challenge is finding meaningfully undervalued stocks.
This involves picking stocks that appear to be trading for less than their intrinsic or book value. Intrinsic value is a way of looking at assets of a company. Investors like the legendary Warren Buffett are essentially looking for stocks where the market-cap is below what the investor considers to be its intrinsic value.
Being wary of giant dividend yields is one thing, but doing my research and investigating the long-term potential of the stock is another. Not only do I need to know the stock, I need to know the industry too.
