FTSE 100: buy high and sell higher

As the FTSE 100 paces itself to hit an all-time high, here’s why I’ll be buying more of its top shares for my portfolio.

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.

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.

Image source: Getty Images

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.

The UK’s main index is now only about 50 points shy of its all-time high of 7,903. Although the general consensus is to buy low and sell high, I’m still planning to buy FTSE 100 shares as the index heads towards the 8,000 mark.

Setting new records

British equities aren’t renowned for their strong growth, but 2023 is set to be a record year for overall profits. Despite an impending recession, Britain’s top constituents generate the bulk of their profits from outside the UK. Hence, analysts are forecasting average pre-tax profits to come in at approximately £280bn. As such, it’s no surprise that the FTSE 100 is in the green since the New Year, and is closing in on its all-time high. Here’s why.

FTSE 100 Pre-Tax Profit
Data source: AJ Bell

The first would be banks. With inflation still stubbornly high, the Bank of England is predicted to continue raising interest rates. Consequently, banks such as Lloyds will benefit as profits grow on rising rates. The second would be China’s reopening as it’s the world’s largest consumer of commodities. With a sizeable chunk of FTSE 100 companies producing energy and metals, the likes of Antofagasta and BP are on many investors’ watchlists as oil and metal prices are expected to continue their rebound.

Higher dividends

These main catalysts would serve to benefit shareholders’ returns in the form of dividend payments. The FTSE 100 is renowned for being one of the world’s biggest dividend generators. And with the bulk of its biggest dividend payers in the financial and commodities sectors, higher profits are most likely to translate into dividends too. Thus, analysts are anticipating ordinary dividends to hit a record high too.

After all, £55.2bn worth of share repurchases were conducted in 2022 alone. Additionally, an additional £2.8bn in special dividends were paid out. As a result, analysts are now pricing in for £79.1bn worth of dividends to be paid out this year.

This comes as no surprise as the average company’s balance sheet has not been in a better position in almost a decade. Big names such as Anglo American and Glencore have strong free cash flow and dividend covers of over two times. This allows them to cover their lucrative dividend yields rather comfortably, which is why I’m enticed to invest in FTSE stocks, as it’s an opportunity for me to generative some passive income.

SectorPre-tax profit growthDividend growth
Oil & Gas24%23%
Financials23%18%
Mining16%16%
Data source: AJ Bell

Cheap blue chips

Nonetheless, the main reason why I’m buying FTSE 100 shares is because of their relatively cheap valuations. While the index hits a high, there are still a couple of big names that are trading on a bargain. Property developer Taylor Wimpey and iron ore giant Rio Tinto suffered last year as construction and industrial activity slowed down locally and internationally.

As a result, these stocks are now trading at relatively cheap price-to-earnings (P/E) ratios with high dividend yields. Moreover, they even have good dividend covers and a strong dividend policy.

So, with house prices remaining robust and iron ore prices rebounding at a rapid pace, here are several FTSE 100 shares I’m looking to buy once my preferred broker launches UK shares on its platform.

FTSE 100 Watchlist
Data source: YCharts

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.

John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group 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.

More on Dividend Shares

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

How I’m trying to make a million from passive income

Invest as much as possible, regularly, and use the passive income to plough back into more shares. Here's how millionaires…

Read more »

Investing Articles

I’d buy 30,434 shares of this UK dividend stock to target £175 a month in passive income

A top insider has spent over £1m buying this 9%-yielding passive income share over the last year. Roland Head explains…

Read more »

Investing Articles

30,000 shares in this FTSE 250 REIT could earn me £559 a month in passive income

Real estate investment trusts can be great passive income investments. And Stephen Wright likes one from the FTSE 250 with…

Read more »

Investing Articles

Down 24% and yielding 9.18! Is L&G the best passive income stock on the FTSE?

Harvey Jones is the first to admit that the Legal & General share price has had a poor year. But…

Read more »

Investing Articles

£10 a day invested in UK stocks could create a second income of £40,000 a year!

Investing even a small amount of money regularly can generate a substantial second income stream in the long run. Zaven…

Read more »

Investing Articles

Here’s the dividend forecast for Lloyds shares out to 2026

Predictions for dividend progress from Lloyds shares over the next few years look upbeat now. But the path might not…

Read more »

Middle-aged black male working at home desk
Investing Articles

1 of my favourite UK dividend shares this December!

Diageo's one of the best dividend growth shares in my Stocks and Shares ISA. At current prices I'm considering buying…

Read more »