I found last week’s stock market rally hugely rewarding. I had previously snapped up a bunch of UK shares when the FTSE 100 dipped towards 7,250, and every one is already worth more than I paid, even after all trading charges.
For me, it’s a positive example of putting theory into practice. My stock picks included Legal & General Group, Lloyds Banking Group, Persimmon, Smurfit Kappa Group and Unilever, which had fallen out of favour with the market.
I bought a load of bargains
Most were successful, profitable companies that were trading at incredibly low valuations of just six or seven times earnings. The exception was Unilever, which traded at 18 times earnings, but that’s cheap by its standards.
Targeting cheap stars shares has two advantages. First, it avoids the risk of overpaying for an overhyped stock. Second, it offers much greater recovery potential, from a lower starting point.
I wouldn’t buy just any cheap stock, though. The big risk is falling into a value trap, where the share price never recovers, and eventually the dividend withers and dies. I don’t think that will happen with these five, although I can never say for sure.
All five FTSE stock picks offered generous levels of income. L&G currently yields more than 8%, Lloyds yields around 6%, Persimmon more than 5%, Smurfit Kappa around 4% and Unilever 3.5%. Better still, I would expect this income to rise over time, as the companies have a good track record of increasing dividends year after year.
Dividends are not guaranteed. They can be cut at any time. In fact, Persimmon slashed its shareholder payouts by 75% in February. By then it was yielding close to 20% a year. That was always going to be unsustainable.
I haven’t stopped buying cheap shares. There are still loads out there and I’d like to own them before the next leg of the FTSE 100 recovery.
Last week’s rally was fuelled by hopes that inflation is on the run, after consumer price growth fell to 7.9% in June. That makes it fragile, though. If July’s figure comes in higher-than-expected, recent gains could quickly reverse.
I’m biding my time
While that would be disappointing, it wouldn’t worry me too much. I’m hoping to hold my shares for 10 or 20 years (and ideally longer). With luck, that gives them plenty of time to recover their full potential, and for my reinvested dividends to compound and grow.
In fact, if the FTSE 100 sells off again, I would see that as a buying opportunity. Just as I did when it dipped below 7,000 in October 2022. The shares I bought then are all nicely up, and I’ve picked up some dividends along the way, too.
Perhaps I’m being ambitious in aiming for a million-pound portfolio. It’s doable, but I won’t do it overnight unless I get lucky and buy the next Tesla for a few pennies. I’m not brave enough to throw my money at risky growth stocks, though. Instead, I pump regular sums into FTSE 100 dividend stocks, whenever they look cheap, and give them decades to grow.
Give it another 20 years, and half a dozen stock market rallies, and I might even get there. I’ll certainly be richer than if I never tried.
