The FTSE 100 is a collection of the UK stock market’s biggest companies. They are not necessarily the biggest and best. But, to have become big enough to merit inclusion in the index, most of the businesses must have been doing quite a few things right, I reckon.
The FTSE 100 hit a new all-time high this week.
That might make it seem like an odd time to start buying. But, in fact, I think drip-feeding money regularly into FTSE 100 shares could help me build serious long-term wealth.
Now strikes me as being as good a time as any to start.
New all-time high does not mean there aren’t bargains
The thing is, although the index overall hit a new all-time high, I continue to think quite a few of the shares in it are attractively priced.
From Natwest with its price-to-earnings ratio of seven to the Vodafone share price in pennies and the 10.2% dividend yield on offer at Phoenix (LSE: PHNX), there are some apparent bargains in the London market.
But what looks like a bargain and what turns outs to be a bargain are not always the same thing.
Maybe companies are priced the way are because high interest rates and weak consumer spending mean their future profits could be lower than their past ones.
Having said that, a lot of FTSE 100 shares do look like bargains to me at the moment. I think they could offer me long-term potential for wealth creation both in terms of share price growth and dividends.
Aiming for a million
Imagine I put £900 each month into a Stocks and Shares ISA.
If I could achieve a 10% compound annual growth rate and reinvested any funds as I went (known as compounding), then after 25% years I would have an ISA worth over a million pounds.
But how realistic is a 10% compound annual growth?
At the moment, I could earn that in dividends alone from some shares: Phoenix is an example. But dividends are never guaranteed. Vodafone is one of the highest-yielding FTSE 100 shares but has announced plans to halve its dividend.
On top of that, share price growth also factors into total compound annual growth. Despite its attractive dividend yield, Phoenix has seen its share price decline by 25% in the past five years.
Finding the right shares to buy
I would spread my monthly £900 over a range of FTSE 100 shares.
I think the 10% target is tough but achievable. Even for Phoenix, for example, a growing dividend per share could help boost my future yield if I buy today. Meanwhile, I see scope for share price recovery. The recent performance seems poor given the business’s strengths, including a large customer base and well-known brands such as Standard Life.
Rocky financial markets could lead some of its assets to produce a loss not a profit, something I see as a risk to profitability over the long term.
But some cheap-looking FTSE 100 shares like Phoenix really do strike me as the sorts of bargains I would happily buy for my ISA if I had spare cash to invest.
