Dividend stocks listed on the FTSE 100 are a great way of building long-term wealth, but they’re not as cheap as they were.
The index of top UK shares has rocketed in value during the recovery of the last three months, making bargains a little harder to find.
The FTSE 100 has been flying
Fashion and lifestyle retailer Next is up more than 40% in that time, while asset manager Abrdn and mining giant Rio Tinto have both climbed more than 30%. Barratt Developments, Barclays, Lloyds Banking Group and Sainsbury’s are all up around 27%.
That’s impressive growth from blue-chips that don’t normally give investors such a sugar rush. As a result, some may fear they have missed a once-in-a-lifetime chance to fill their boots.
Since 12 October, the FTSE 100 index has jumped from 6,826 to over 7,900 on Friday. That’s a big increase. I love buying top dividend-paying shares when they’re cheap, so have I missed my moment?
The good thing about buying individual stocks rather than trusting to a FTSE 100 tracker is they all perform in different ways, at different times. While the index as a whole is more expensive than it was, that doesn’t apply to every stock.
It isn’t hard to find stocks that have missed the rally. Over the last three months, Unilever climbed just 2.67%. Other top dividend growth stocks have fallen, including Reckitt (2.09%), BP (2.98%), Diageo (1.35%), Shell (6.18%) and British American Tobacco (7%).
So for a contrarian bargain-seeker like me, there are still plenty of opportunities out there. Unilever looks cheap by its pricey standards, trading at 17.6 times earnings, while its yield is much higher than usual, at 4.24%.
There are still cheap stocks out there
Shell also looks cheap trading at 11.5 times earnings (despite this week’s “obscene” record $40bn profit) while British American tobacco trades at 9.4 times earnings. Even recent boomers like Rio Tinto and Barratt look dirt-cheap, according to their price/earnings ratios, which are 5.8% and 5.6% respectively.
Another advantage to buying individual stocks is that while the FTSE 100 average yield has dropped to 3.53%, much higher income streams can be found. Aviva climbed 7.82% in the last three months, but still yields 6.51%, while Abrdn yields 6.8%, and British American Tobacco pays income of 6.9%.
Some individual dividend stocks are yielding even more, notably Barratt (7.62%) Vodafone (8.45%), fund manager M&G (8.76%), and Rio Tinto (10.68%).
Naturally, dividends are never guaranteed, while a low P/E may look tempting but doesn’t make a stock good value on its own. There is also the danger of buying into a value trap, where the share price never recovers.
Despite the recent surge, the FTSE 100 is still crammed with bargain dividend shares. And I’m gearing up to buy some more.
