While winning millions on the National Lottery is highly appealing, the odds of doing so are around one in 45m. As such, using your spare capital to buy undervalued FTSE 100 shares could be a better idea – especially with the index appearing to be undervalued at the present time.
The FTSE 100’s dividend yield of 4.3% suggests that the index offers a wide margin of safety now. It is significantly higher than its long-term average of around 3.5%. In fact, it has only been higher in the last two decades during the financial crisis, when the prospects for large-cap shares were highly uncertain.
As a result, the index appears to offer the chance to buy high-quality stocks while they trade on low valuations. Certainly, there are risks facing the world economy, such as the trade war between China and the US. But, with global GDP growth expected to remain robust in the coming years, the prospects for the index could be impressive.
While the FTSE 100 may have a relatively high yield when compared to its historic range, its low valuation appears to be even more enticing when it is compared to other major indices. The US equivalent index, the S&P 500, has a dividend yield of around 2% at the present time. This suggests that the FTSE 100’s price level could double and still leave the index offering better value for money than its US peer.
Clearly, that is unlikely to take place in the short run. It may take a number of years for the index to deliver a significantly higher price level. But, for long-term investors, it presents a significant opportunity to buy high-quality stocks while they offer scope to trade at substantially higher price levels over the coming years.
Of course, diversifying across a wide range of companies is likely to be crucial for any investor who is aiming to generate high returns in the long run. Given that the FTSE 100 contains a large number of companies that trade on historically-low price-to-earnings (P/E) ratios, building a portfolio of undervalued stocks is unlikely to be a challenging process.
Furthermore, the international focus of the index means that it offers a significant amount of geographical diversification. This could help an investor to mitigate localised risks such as Brexit, while capitalising on the growth potential of the world economy.
Buying FTSE 100 companies with your excess capital could be a better idea than the National Lottery. With the cost of share-dealing having fallen heavily in recent years, the index is more accessible to a range of small and large investors than it ever has been. Therefore, now could be the right time to buy a variety of large-cap stocks for the long run.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.