One year ago, the FTSE 100 was near the bottom of its crash after Covid-19 emerged and devastated the markets. The index still had a few points further to fall over the coming few days in March 2020, but was close to its nadir.
Hindsight makes investing look easy. And it’s clear now a good tactic last spring would have been to back up the truck and load it with the dirt-cheap shares of high-quality businesses to hold for the stock market recovery. Investors could even have restricted their share picks to big-cap companies in the FTSE 100 and produced an impressive return over the past year. Or they could have joined in the ‘dash for trash’ and bought shares in businesses that would go on to be damaged by the pandemic.
An impressive stock market recovery
In both cases, shares have been shooting up over the past few months. And that process has been accelerated by the ever-improving economic news on the ground. In many cases, businesses have adapted and continued to trade through the crisis and the lockdowns. And scientific and medical progress offers the world a clear view of a potential escape from the pandemic. It looks like treatments and vaccines for Covid-19 will end up pushing the disease down so that it becomes less prominent in our lives.
So, even if businesses have been unable to trade in the lockdowns, it looks like they’ll be able to restart their operations soon. And their shares have been rising to accommodate the improving outlook. After all, the stock market always looks ahead. And what matters is what those businesses are going to achieve, rather than the trading figures they’re producing now.
The rally in stocks has been broad-based. And it’s possible to become discouraged and fear we’ve missed the boat. But I reckon it’s still possible to buy cheap stocks as measured against their current or future profit expectations. One good indicator, for example, is the presence of a chunky dividend yield.
The appeal of a high dividend yield
I’d aim to select high-yield dividend stocks with a focus on the quality of the underlying business and its future prospects. A portfolio of such income shares could go on to deliver a growing passive income. And I’d plan to reinvest the dividend stream back into my shareholdings so that my gains start compounding over time.
However, a high dividend yield is not a positive indicator in itself. And not all stocks with a big yield are worth buying. Some companies may not be able to repeat their historical dividends, especially in today’s harsh economic environment. But if I focus on the quality of a firm’s cash flow and forward projections for earnings, I should be able to identify those companies with attractive dividend prospects.
There’s no guarantee this strategy will help me produce decent long-term returns from shares. And successful stock picking isn’t easy. But I’m prepared to embrace the risks because the long-term performance of the stock market, in general, has been positive.
