The FTSE 100 looks like good value right now. To me, that’s a compelling reason to consider investing in a Footsie index tracker for at least part of a diversified long-term portfolio.
Decent passive income
My data provider lists the dividend yield of the index as 3.5%. It’s been higher though. And as the economy hopefully recovers and strengthens, I’m optimistic companies can trade well and increase their dividends, driving the overall yield of the index up again.
So there’s potential for a growing passive income from the index in the coming years. But on top of that, the overall price-to-earnings multiple is running below 14.
That looks like a modest rating and it’s been bigger in the past. I expect the multiple will likely increase to 15, 16, 17 (and perhaps beyond) when businesses are firing on all cylinders again in better general economic conditions.
That means there’s potential for the index to rise because of an expanding multiple and because of increasing profits earned by the constituent businesses.
In hindsight, one of the best times to buy the FTSE 100 index was at the bottom of the pandemic plunge in 2020. Since then, there’s been a rapid recovery. And that underlines another characteristic of the Footsie – it has so far always bounced back from its lows.
There’s a good reason for that. Businesses are resilient. And the large-cap enterprises in the index are often well-funded and long-established – they’ve got staying power. But on top of that, the FTSE 100 has a lot of companies with cyclical operations, such as banks, miners, oilers and retailers.
Cyclical sectors can be prone to famine-or-feast economics causing stocks to plunge. And that effect can take the Footsie down, such as during the pandemic. But as seen, cyclicality works in both directions. And cyclical outfits can recover fast.
Economic prosperity ahead?
New investors have missed the pandemic bottom. But the FTSE 100 is not far from its all-time high. And it’s been here a few times before.
One piece of proven wisdom in the stock market is that stocks making new highs can go on to do well for investors. And I believe that theory may work for the Footsie as well.
Therefore, when and if the Footsie makes a high, the situation could indicate a phase of general economic prosperity ahead for companies. So with the index near its highest-ever level and the valuation modest, now may be one of the best times to invest in the FTSE 100.
However, I wouldn’t stop there. Other indices have historically generated higher long-term returns than the Footsie. For example, the UK’s FTSE 250 mid-cap index and America’s S&P 500.
So I’d aim to diversify into those as well. And, of course, many investors have done well in the past by targeting higher returns from investing in the shares of individual businesses.
There are no guarantees of a positive long-term investment outcome. But in my eyes, there’s value and positive potential in the stock market, including the FTSE 100 index right now.
