The worst of the stock market crash may now be over, but the FTSE 100 is still down by 20% so far this year. Now that lockdown conditions are easing in and businesses are reopening, I think it’s a good time to start looking for cheap FTSE 100 shares to buy.
Although many businesses are likely to experience tough trading conditions over the next 12 months, I think the FTSE offers some good buying opportunities at current levels.
Shouldn’t we wait until things improve?
Given the uncertain outlook for many companies, you might decide it’s safer to wait until conditions improve before investing.
The problem with this is that as business performance recovers, stock market valuations will probably rise. US billionaire Warren Buffett once said investors should remember that “the future is never clear; you pay a very high price in the stock market for a cheery consensus”.
Mr Buffett’s preferred approach is to invest when he thinks companies are trading below their long-term value. This provides a useful margin of safety that can help protect you from losses if things don’t go as well as you hope.
Are FTSE 100 shares cheap today?
The simplest way to buy FTSE 100 shares it to invest in a tracker fund. By investing in the fund, you own a slice of every business in the index.
The FTSE 100 is trading on about 13 times earnings at the moment, which I think looks quite affordable. The official FT figures show the index offering a dividend yield of 5%, which also looks very attractive. However, we’ve seen a lot of big dividend cuts this year. I think the final yield is likely to be lower. My sums suggest a figure somewhere between 3% and 4%.
I’d be happy to buy a FTSE 100 tracker fund at current levels. The only real problem with this approach is that you have to own every company in the FTSE 100.
This means that you end up with a portfolio that’s heavily weighted towards mining, oil and financial stocks. This isn’t ideal, in my view — I want more exposure to faster-growing businesses, such as consumer goods, tech and pharma.
The simplest way to achieve this is to buy individual FTSE 100 shares, rather than a tracker fund.
Which FTSE 100 shares should you buy?
Everyone’s needs are different, but if you’re investing in FTSE 100 stocks then I think it’s fair to assume that you’re looking for dividend income as well as long-term gains.
This year has shown us the dangers of buying shares with very high dividend yields, as they’re often more likely to be cut. For new buyers today, I think it makes sense to focus on companies with yields that are well covered by earnings and haven’t been cut in the market crash.
In my view, good choices for new investors might include Unilever (3.8% yield), National Grid (5.7% yield) and pharma giant GlaxoSmithKline (4.8% yield). Telecoms group Vodafone offers a 6% payout which looks fairly safe to me, while tobacco investors can earn 7% from British American Tobacco.
I reckon that owning companies like these in a long-term stocks portfolio is the safest and easiest way to build wealth and retire early. It’s what I’m doing. I think it could work for you too.