The FTSE 100 — the UK’s main stock-market index — contains the 100 largest listed companies in London. But Britain’s elite stock index has seemed like a poor investment for many years.
The FTSE 100 flops
Here’s how the Footsie has performed over five different time periods:
| One month | -0.9% |
| Six months | -3.9% |
| 2023 to date | +1.9% |
| One year | +9.5% |
| Five years | +7.7% |
Although the blue-chip index has lost ground over one month and six months, it is up almost 2% this calendar year. Also, it is ahead by almost a tenth over one year and close to 8% over five years.
If I’d had all my portfolio in the FTSE 100 for the past half-decade, I’d feel pretty miserable looking at these results. After all, a 7.7% return over five years comes to a simple return of roughly 1.5% a year.
These returns exclude dividends
Looking at the above table, it appears that I might have been better off keeping my money in top-paying, super-safe savings accounts since late-2018. However, the above figures show only capital gains and, therefore, exclude cash dividends.
As it happens, FTSE 100 stocks pay some of the highest cash yields in global stock markets. Indeed, the index currently offers a dividend yield of around 4% a year, which I need to add onto the above capital returns.
Adding in, say, 20% for five years of dividends boosts the above return to 27.7% in half a decade. That’s a simple return of over 5.5% a year. This would have beaten all UK savings accounts over that timescale.
Why take the risk of owning UK shares?
Looking at table-topping savings rates today, I can get 5.2% a year (before tax) on the highest-paying easy-access deposit account. Thus, with interest rates the highest they’ve been since the global financial crisis of 2007/09, why bother investing in stocks and shares?
The simple answer to this question is that history has shown that shares have produced superior long-term returns to bonds and cash. Therefore, if I’m investing for the long run, then I should keep the majority of my wealth in stocks — just as many professional fund managers do.
Also, buying shares means become a part-owner of companies. This gives me certain rights, such as the ability to vote on company resolutions and attend annual general meetings (AGMs).
However, one key reason why my wife and I keep almost all of our money in shares is that we expect these businesses to grow over time. And when company revenues, earnings, and cash flow rise, so too should company dividends.
The Footsie looks far too cheap to me
Furthermore, while a great deal of our family portfolio is invested in US and global index funds and stocks, we have gradually increased our exposure to cheap and unloved FTSE 100 shares.
Why? Because I see the Footsie as deeply undervalued right now, both in historic and geographical terms. It trades on a multiple of 11.2 times earnings, for an earnings yield of 8.9%. The corresponding figures for the US S&P 500 index are 19.5 and 5.1%, respectively.
Summing up, I’ve read way too many articles in 2022/23 warning of ‘the death of the London market’. I disagree strongly, which is why I will continue snapping up FTSE 100 stocks at bargain-basement prices!
