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The FTSE 100 may have trailed Wall Street this year but it’s packed full of cheap shares as a result, and I’m buying as many as I can afford.
Stocks listed on the blue-chip index currently trade at an average valuation of around 10 times earnings, which is roughly half the US S&P 500’s price/earnings ratio of 20.5.
In recent days, the two indices have been heading in different directions. The FTSE 100 is up 4.96% in the last month, while the S&P 500 is down 2.61%. As ever, we have to approach past performance figures with caution. They’re no guide to what happens next. But I love the fact that UK shares are half the price of US rivals, and I’m taking advantage.
I’m getting ahead of the rally
I buy stocks with a long-term view and think it pays to invest in cheap shares rather than expensive ones. It reduces the risk of overpaying, and allows the stock to grow from a much lower base. The S&P 500 worries me, especially the tech sector, where valuations have been driven dizzyingly high by the fuss over artificial intelligence.
I’d love to have bought tech giant Nvidia at the start of the year, but I wouldn’t buy it at today’s blockbuster valuation of around 100 times earnings.
What I am enjoying is buying dirt cheap UK dividend stocks such as Glencore, Legal & General Group and Taylor Wimpey. There are plenty more I haven’t bought lately but would like to, notably Barclays and Rio Tinto.
All these stocks trade at less than 10 times earnings, which is a brilliant entry point. They also offer super-generous yields. Barclays trades at a measly five times earnings and yields a pretty decent 4.67%. Rio Tinto trades at 7.7 times earnings and yields 7.75%. They’re right at the top of my shopping list.
And I haven’t even mentioned insurer Phoenix Group Holdings, which trades at 6.5 times earnings and yields 9.67%.
Ultra-high yields like these are never completely safe. They’ve usually been driven upwards by a falling share price. However, in most cases, the firms’ boards are committed to maintaining shareholder payouts. Glencore’s and Rio Tinto’s could prove fragile if China’s economy continues to slow. As ever with investing, there are no guarantees.
Better times ahead
All of the stocks I’ve mentioned are solid, profitable companies, just not as profitable as investors would like. That should reverse at some point. Barclays is making a small fortune but is still incredibly cheap.
I can’t quite believe the opportunities that are out there at the moment, and only wish I had money to buy more of them. I want to get in early, before the FTSE 100 finally really sees lift-off. That may come when it becomes clear that interest rates have peaked and are about to start falling.
I have no idea when the market will recover but that doesn’t worry me too much. It means my reinvested dividends will pick up more stock at today’s low prices. It also allows me to buy more shares before they rally. Which will make me richer when they do finally fly.
I’m looking at a brilliant opportunity to head towards a fortune from cut-price UK blue-chips, and I’m not going to waste it.
