The FTSE 100’s capacity to generate high returns over the long run may have diminished in the eyes of some investors following its recent market crash. However, the index has a strong track record of recovery, and its 8% annualised total returns since inception highlight its growth potential.
As such, through buying stocks that offer wide margins of safety, operate in sectors with long-term growth potential and have dividend growth potential over the coming years, you could increase your chances of obtaining a seven-figure portfolio.
FTSE 100 valuation
The FTSE 100’s crash means that many of its members currently offer wide margins of safety to new investors. In other words, they trade at a price that is below their intrinsic value, which suggests they offer capital growth potential over the long run.
Of course, in some cases their low valuations are merited. Some companies and industries face a highly uncertain future that could mean their sales and profitability come under severe pressure.
However, in other cases weak investor sentiment towards the wider equity market means that there are bargain shares on offer in sectors with solid growth outlooks. Buying a selection of them today and holding them through a stock market recovery could enable you to obtain a relatively high total return in the coming years.
Long-term growth outlook
At the present time it is difficult to ascertain which FTSE 100 industries will deliver solid growth in the coming years. After all, the lockdown could have changed consumer habits and trends from those that were gaining traction prior to coronavirus.
However, some industries look set to have bright long-term futures. They include healthcare, which could benefit from an ageing population, as well as online retail businesses, which could experience rising demand as consumers switch from shopping in-store to over the internet.
Through buying a diverse range of FTSE 100 stocks in industries that are likely to benefit from bright growth outlooks, you could obtain a faster growth rate than that of the wider stock market.
FTSE 100 dividend growth opportunities
With interest rates likely to stay low over the coming years as the Bank of England supports the economy, dividend growth stocks could become increasingly popular among income-seeking investors.
As such, buying companies that have maintained their dividends or that could return to dividend growth as the economic outlook improves could boost your returns. A large proportion of the FTSE 100’s past total returns have been derived from the reinvestment of dividends, which suggests that an income focus could help you to build a large nest egg.
Making a million
Assuming an 8% annualised return on a £10,000 investment, it would take 60 years to build a £1m portfolio. However, by focusing your capital on undervalued FTSE 100 shares in sectors that offer dividend growth opportunities, you could generate higher returns than the wider market and make a seven-figure portfolio a more realistic goal during your lifetime.
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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.