The Stocks and Shares ISA is a brilliant way to invest for long-term income and growth, as all returns are tax free. I’m planning to cram mine with FTSE 100 stocks at today’s bargain prices.
The FTSE 100 has undeniably struggled lately. Over five years, it’s down 0.76%. It has climbed over the last year, but only by 5.17%. Once its 4% yield is included, investors enjoyed a total return of almost 10%. That’s better, but hardly brilliant.
Global investors have been shunning UK shares, scared away by Brexit, inflation, political turmoil and the general downbeat mood. This is offering me a superb opportunity to buy my favourite dividend stocks at greatly reduced prices. I’m not going to waste it.
No time to lose
The lead index now trades at around 10 times earnings, well below the 15 times traditionally seen as fair value. By contrast, the S&P 500 is valued at over 30 times earnings, after the US tech resurgence. That’s a huge valuation gap, and I reckon it will start to close.
As the FTSE 100 retreated towards 7,250 in recent weeks, I stepped up efforts to buy dirt cheap dividend shares. Valuations had fallen to such a degree – and yields had risen – that it seemed rude not to. Also daft.
Everywhere I looked, I saw top dividend stocks trading between five and six times earnings, while yielding 7% or more. So I filled my boots. Or rather, my portfolio. Wednesday was fun, with the FTSE 100 jumping 1.8% in a day following June’s inflation drop. Many of my recent stock purchases did a lot better than that.
Legal & General Group soared 4.5% on the day, while M&G jumped 4.15% and Lloyds Banking Group climbed 2.2%. Another recent purchase, tech and private equity play Scottish Mortgage Investment Trust, jumped 4.56%.
I’m already ahead and I only bought these stocks a few weeks ago. This shows the benefits of buying when prices are down. Of course, they could fall back just as quickly, that’s the risk investors take. But with luck, I’ve got years of dividend and share price growth ahead of me, starting from a nice low base.
The future will be bumpy but fun
I’m not expecting the FTSE 100 to suddenly surge towards 8,000 and beyond. The outlook remains uncertain, with inflation a menace despite Wednesday’s drop. Markets still expect the Bank of England to hike base rates from today’s 5% to 5.75%. A recession cannot be ruled out.
In a way, I don’t want the FTSE 100 to suddenly play catch-up with global stock markets. I’m hungry to take advantage of today’s low valuations. I don’t want them to get more expensive before I’ve deployed all my cash.
As always, I’m buying my shares with a minimum five-to-10-year view. With luck, I’ll hang onto them for a lot longer than that, to give my dividend income and share price growth plenty of time to compound.
It’s a long time since I’ve been this optimistic about the FTSE 100. It offers me an appealing combination of low share prices with high recovery prospects, once inflation is beaten. I reckon that in a decade’s time, I’ll be thrilled I took advantage today.
