In recent years, investing in the UK’s elite FTSE 100 index has been a pretty thankless task. For example, over the past five years, the index has lost 3.3% of its value (excluding dividends). So am I mad because I’m still buying cheap FTSE 100 shares?
Footsie shares flop
Here’s how London’s main market index has performed over recent periods ranging from one month to one year:
| One month | Six months | 2023 to date | One year |
| -4.6% | -7.3% | -1.6% | -2.1% |
Looking at these figures, one could easily conclude that the London market is moribund and even in terminal decline. Indeed, I’ve read countless articles in 2023 to have drawn similar conclusions.
Then again — and crucially — these figures exclude dividends, which are a major contributor to the long-run returns from UK equities. In fact, the FTSE 100 currently offers a dividend yield of 4.1% a year, which trumps the cash yields on offer from other major stock markets.
For example, the US S&P 500 index offers a modest cash yield of below 1.6% a year. This is mainly because large US corporations prefer to reinvest their profits back into their businesses, so as to boost future growth.
I don’t think I’m crazy
In my title, I asked whether I’m crazy for loading up on these shares. Well, the first point I’d make is that they provide me with market-beating dividend income. This is something I desire as an older investor (I’m 55+).
My second point is that the Footsie looks incredibly cheap today, both in geographical and historical terms. It trades on a lowly multiple of 10.5 times earnings, generating an attractive earnings yield of 9.5%.
Furthermore, this means that the FTSE’s current cash yield is covered more than 2.3 times by trailing earnings, which is a comfortable margin of safety.
My third argument is that the FTSE 100 is not a barometer of the UK’s economic health. Indeed, at least 70% of its earnings come from overseas. Hence, I regard this index as a cheap route to buy into future global growth.
And my fourth point is that foreign investors have made repeated forays to buy undervalued UK-listed businesses. In particular, mega-cap US and European companies and private-equity firms seem very keen on snapping up bargains from the London market.
My latest buying spree is done
For the record, I suspect I won’t be buying many more FTSE 100 shares for a little while. That’s because my wife and I have spent 15 months gobbling up cheap UK stocks at low prices.
What’s more, we’ve now finished building a new family portfolio of 27 shares. This consists of seven US stocks, 15 FTSE 100 shares and five FTSE 250 holdings. Given that this pot is now reasonably well-diversified, I’ll sit back and see how it gets on.
However, should the UK stock market fall deeper into value territory, then I reserve the right to change my mind. After all, with a horizon stretching at least a decade ahead, buying dirt cheap UK shares today could prove to be a wonderful winner by 2033!
