The FTSE 100 has been above 8,000 points for about a month now. Are the days of cheap shares over?
Well, in the past 10 years, the index has risen just 23% — with about half of that in 2024 alone!
Dividends would add a bit. But it still looks like a poor 10-year ride compared to long-term average Footsie returns of about 6.9% per year.
Nearly double
That should compound to a 95% rise every decade. And it suggests FTSE 100 shares are still relatively cheap, even after this year’s gains.
I’ve made no use of the new Stocks and Shares ISA allowance so far. But that’s only because I haven’t had the cash yet. When I do, I’ll be buying as many cheap shares as I can.
Dividend yields are still high, so that’s my starting point. And I might pick my first buy from a cyclical sector that I think has fallen below the radar.
Cyclical dividends
Not long ago, mining stocks like Rio Tinto (LSE: RIO) had very big yields, and everyone wanted them. Then the sector turned down as world inflation soared and Chinese demand slowed.
But cycles like that are common. And commodity prices can vary a lot.
How can the long-term demand for copper, iron, and all the rest of the earth’s goodies not be strong? Nobody will be building much without them.
Forecast value
Today, we have a forecast dividend yield of 5.9%, and a forward price-to-earnings (P/E) ratio of 10.3.
Commodities prices are still a bit weak. Iron ore, for example, is way down on peak 2021 prices. And that’s the main risk. Rio and similar companies have no control over world prices, and can suffer in a downturn.
But I see a low valuation, and I’d buy Rio in anticipation of stronger future demand.
Beware value traps
Excess dividends can destroy value though. For years, BT Group and Vodafone paid out big cash that wasn’t covered by earnings. Investors noticed, and the share prices fell slowly and steadily.
There’s no such thing as a free dividend, and shareholders paid with capital losses.
The inevitable happened with Vodafone, and its 10% yield will be cut in half next year. BT, meanwhile, might have turned things round after just posting a nice set of results.
Both of these could be ISA candidates for me now, but neither is out of the woods yet. I’ll keep watching.
More essentials
What all these stocks share is that they provide essential goods and services. And that’s where I look for more value in cheap stocks.
So I might buy Tesco or Unilever ahead of anything in the leisure business, like holiday airlines or fashion brands.
And I’d always want at least one bank or other finance stock in my ISA. Finance is as essential as food and drink, and no business or economy can work without it.
Fill that ISA
Whether I’ll buy any of the stocks I mention here, I have yet to decide. It’ll depend in part on valuations at the time.
But with an untouched ISA limit waiting for me, I relish the search for cheap shares while they’re still there.
