The 2020 stock market crash has thrown up some cheap FTSE shares and attractive investment opportunities.
Some of these shares will make decent vehicles for compounding gains over the years to come. And one of the open secrets about wealth creation is that compounding works best when you stick at it and do it for a long time.
Cheap FTSE shares with steady underlying businesses
If you can identify a steady underlying business and buy its shares at prices that make sense, you’ll be off to a good start. Then reinvest all the shareholder dividends you receive along the way. And if you sell a share for any reason, plough the proceeds back into other great stocks as well.
In that way, your initial invested capital will make gains from dividends and rising share prices. But so will the profits you reinvest, over again. It’s just like how interest accumulates in a cash savings account, but with differences – share prices can go up and down, and companies can stop and start dividends.
Indeed, there are some risks with shares that you won’t face in a cash savings account. But the flip side of risk is opportunity. Underlying businesses can expand and grow, pushing dividends and shares higher. But you must take on the risk first before you can experience higher gains from the upside potential.
However, there are some things you can do to keep the risks as low as possible. One is to make sure the underlying business is well-financed with a strong balance sheet. Another is to look for a record of strong trading and decent profit margins, which would suggest the company commands a strong trading niche in the markets. A third is to be aware of cyclicality.
Cyclical versus defensive shares
Indeed, highly cyclical enterprises tend to see their earnings, share prices and dividends wax and wane. The underlying businesses depend heavily on favourable general economic conditions to thrive. You’ll find a lot of them in sectors such as retail, mining, oil, finance, housebuilders, travel, hospitality and leisure and others.
Sometimes it can be wise to invest in a firm with cyclical operations. However, timing can be tricky. But if you’re looking for enduring, defensive stocks to hold for the long term to compound your gains, fertile sectors include utilities, fast-moving consumer goods, pharmaceuticals, IT, technology and others.
And it really is a great idea to get into the groove of compounding because the gains tend to rise exponentially. In other words, the longer you do it, the faster the gains tend to accelerate. In the later years of a long period of compounding, your gains could end up shooting skywards like a rocket.
Meanwhile, I see several FTSE candidates as potential vehicles for compounding gains over the long haul. For example, I like the look of drinks suppliers A G Barr, Britvic and Diageo. I’m also keen on pharmaceutical companies AstraZeneca and GlaxoSmithKline. In fast-moving consumer goods, I’d consider British American Tobacco and PZ Cussons. And power network provider National Grid could also fit well in a long-term portfolio.
Do be sure to do your own thorough research before buying any share. And good luck with your investing journey!
Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Britvic and GlaxoSmithKline. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended AG Barr and Diageo. 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.