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Making a million on the FTSE 100 might not be as hard as you think

Whenever I’m asked about starting investing, my advice is pretty much always to buy shares in top quality FTSE 100 companies and hold them for decades. “But,” folks will reply, “that’s still a lot of companies and I don’t know which are good ones.

So what’s the best way for a newcomer to narrow it down? I’m going to reproduce a FTSE 100 strategy that I read about many years ago, but I’ll apply the rules slightly differently to the original to account for today’s technology.

I’ll reveal the strategy later, but first here are the 10 companies it suggests (with forward P/E and dividend yields based on mid-week prices)…

Company Ticker Sector P/E Div yield
British Land Company BLND REIT 17.3 5.3%
Diageo DGE Beverages 24.5 2.2%
Lloyds Banking Group LLOY Banks 8.0 5.5%
3i Group III Financial Services 7.7 3.2%
National Grid NG Utilities 15.4 5.6%
Ashtead Group AHT Support Services 10.6 2.0%
Berkeley Group Holdings BKG Home Construction 8.6 3.6%
Melrose MRO Construction & Materials 13.4 2.8%
Associated British Foods ABF Food Producers 18.1 1.8%
Royal Bank of Scotland RBS Banks 8.8 5.0%

We have a couple of banks, which are not without risk but are on low P/E valuations and offer very nice dividends. I like banks right now.

There’s a handful of very stable companies, including drinks giant Diageo, British Land, and Associated British Foods — not on bargain valuations, but I think fairly valued for their quality and stability.

National Grid is consistently my favourite income pick from the utilities sector, and I think the remaining selections make up a nicely rounded portfolio. I’d expect anyone who bought these 10 would do pretty well over the next couple of decades.

Confession

Time to confess. What I was reading back then was a claim that the majority of fund managers perform badly, because of their focus on short-term returns, over-trading, and high charges.

The writer (I wish I could remember who it was) reckoned he could beat the average fund manager by throwing darts at the FTSE 100 listing in the Financial Times. That’s what he did and, sure enough, he came out ahead of the professionals.

And that’s all I’ve done, except I used a random number generator as I don’t want darts stuck in my screen.

Now, I’m not really suggesting that you actually select your stocks at random (and neither was the original writer) — you might as well just buy a FTSE 100 index tracker if that was your strategy, and gain exposure to them all.

All good

No, the point is just that, compared to many of the thousands of companies you could invest in, from tiny penny stocks, to risky oil explorers, to the next “get rich quick” fad, FTSE 100 stocks are pretty much all good ones.

And you don’t need to worry about getting your FTSE 100 strategy perfect at the start — just dive in, pick a few companies you like the sound of, and learn as you go along.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK owns shares of Melrose. The Motley Fool UK has recommended Associated British Foods, British Land Co, Diageo, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.