Ever see a stock market segment that looks just ripe for picking, for long-term passive income? I feel that way about FTSE 100 financial stocks today.
Why FTSE 100?
I don’t have nerves of steel. And the smaller the market cap of a stock, the more twitchy I get. I mean, look what’s been happening to Metro Bank shares of late. It really makes me want to stick to the big ones.
I rate safety as more important in tough times, like now. Nobody can predict the next stock market crash, but I want to be always ready for it.
And FTSE 100 firms do generate huge quantities of cash.
Forecasts suggest that total FTSE 100 ordinary dividends could smash through the all-time record, and reach close to £90bn in 2024. I’d like some of that.
Why financial stocks?
Let me be clear that I’d never invest solely in financial stocks. Or in any one sector. No, diversification is a key part of my strategy.
But with a diversified ISA, I do have my favourite sectors.
Financial stocks are, I reckon, the ultimate ‘picks and shovels’ investment. Those are named after the folk who got rich selling equipment and supplies to the prospectors in the gold rush.
Is there any sector that everything else depends on as much as finance? Nothing can work without it.
And broker forecasts put the sector at the front of the Footsie’s earnings and dividend growth outlook.
Why now?
I don’t try to time the market, because I just can’t do it. Trying to pick the highs and the lows, get in at the bottom and out at the top… that’s not for me.
But if I think we’re in a time when a sector is too cheap, I should buy, right?
Looking at banks, Barclays is on a price-to-earnings (P/E) ratio of a low 5, with a dividend yield of 4.9%. For insurer Aviva, the P/E is higher at 13, but there’s a huge 7.8% dividend.
These are forecasts, though, and they might be wrong. Nothing is guaranteed here.
I’ve chosen just a couple of financial stocks that I rate as good value. But there are plenty more I could have picked out.
Why hesitate?
Speaking of timing, might this be a bad time to buy financial stocks?
The International Monetary Fund expects UK economic growth to be the slowest in the G7. And we’ve even had forecasts of interest rates staying around 5% for another five years!
That could kill borrowing, and could be hard on the banks in particular.
So yes, the short-term outlook for financial firms might not be too bright. But then, times of maximum pessimism are times to buy, aren’t they?
What next?
For me, with my long-term research done, my next step is easy. I keep saving my spare cash, and I’ll choose whichever looks the best value for my next investment.
But anyone thinking of buying any of these needs to do their own research, and be happy investing in financial stocks when the economy is so weak.
