While a FTSE 100 tracker fund could deliver impressive total returns in the long run, beating the index could enable you to enjoy a more prosperous financial future.
Even though the index has made gains over the last decade after the lows of the financial crisis, there appear to be a number of large-cap shares that offer wide margins of safety.
Here are two prime examples, with both stocks also having impressive dividend yields. While they may be experiencing uncertain operating conditions at the present time, their valuations suggest that they may be able to outperform a FTSE 100 tracker fund over the coming years.
The prospects for commercial property stocks such as Landsec (LSE: LAND) may seem to be somewhat precarious at the present time. After all, the UK is undergoing a period of major political and economic change that could lead to deteriorating confidence in a variety of regions.
This could negatively impact demand for commercial property, and may mean that REITs such as Landsec undergo a period of slower growth.
Investors, though, appear to have priced in such an eventuality. The FTSE 100 company currently trades on a price-to-book (P/B) ratio of just 0.6. This suggests that the company’s shares could increase by two-thirds and continue to offer a margin of safety.
Furthermore, with Landsec currently yielding 6.6%, the company’s income investing prospects appear to be bright. As such, for investors who are able to take a long-term view on the UK commercial property sector, the stock could present an opportunity to capitalise on the property market’s cyclicality.
Also offering the potential to outperform a FTSE 100 tracker fund is mining company Rio Tinto (LSE: RIO). Its shares have fallen by 19% over the last six weeks, with concerns surrounding the prospects for the world economy causing investors to adopt an increasingly risk-averse stance towards the wider industry.
This situation could continue over the near term. The prospect of a satisfactory conclusion to the US/China trade dispute seems relatively unlikely over the short run. This may mean that additional tariffs come into place, with there being the potential for a negative impact on global economic growth.
As a cyclical stock, Rio Tinto’s financial performance could suffer if demand across the wider mining industry comes under pressure. Again, investors seem to have priced in this eventuality. The company’s shares currently trade on a price-to-earnings (P/E) ratio of 11.6. And, with a dividend yield of 5.2%, the company’s total returns could prove to be highly attractive over the long run.
Therefore, the stock appears to have the potential to outperform the wider FTSE 100. While a tracker fund generally offers greater diversity than a portfolio of individual shares, buying stocks such as Rio Tinto and Landsec could enable you to obtain a higher return than the index.
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Peter Stephens owns shares of Landsec and Rio Tinto. The Motley Fool UK has recommended Landsec. 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.