The FTSE 100 has bounced back over the last couple of weeks. The blue-chip index is now trading back at the level seen just before Russia invaded Ukraine.
However, despite this rapid recovery I think the index still looks attractively valued. If I was investing £20,000 in a Stocks and Shares ISA ahead of the 5 April deadline, I’d certainly be looking at this sector of the market.
Buying the FTSE 100?
The lead index contains the UK’s 100 largest publicly-traded businesses. Many of these companies make most of their profits abroad. As an investor, this means I can get plenty of overseas exposure while still investing in UK stocks.
One way to invest in this broad mix of businesses is to buy a FTSE 100 index tracker fund. By grouping all the companies in index together and adding up their earnings and share prices, I can get an average valuation for the FTSE. My research shows that today, the index is trading on around 15 times earnings, with a 3.3% dividend yield.
As a long-term investment, I’d be happy investing £20,000 into an index tracker at this level. I’d feel confident that over the coming years it should provide me with a growing passive income from dividends, and some capital gains.
A better choice?
Of course, the future performance of the stock market is never guaranteed. The 2020 crash is still fresh in my mind. Current events also seem to pose some extra risks to the global economy.
An additional concern for me is that the FTSE 100 is quite heavily weighted towards oil, mining and financial stocks. I prefer to have a more even spread of sectors in my portfolio.
History suggests the market will always recover after a crash — eventually. However, given the risks I’ve outlined here, I think it’s worth some extra effort for me to research individual FTSE 100 stocks I’d like to buy.
This is the approach I’d use to invest £20k in the index today. My aim would be to buy individual shares that would provide a higher passive income and a more balanced performance than the index in future downturns.
FTSE 100 stocks I’d buy
Passive income is important to me, so I’d be looking for shares with a dividend yield above the FTSE 100 average of 3.3%. However, I’d also have growth in mind.
I think we’re all feeling the impact of rising prices at the moment due to surging inflation. For this reason, I would not just look for high yields.
Instead, I’d focus look for companies with the power to raise prices and continue growing in more difficult circumstances. I’d also look for dividend payouts that were covered at least 1.5 times by earnings, to reduce the risk of sudden cuts.
Companies on my radar at the moment that look promising include consumer goods group Unilever (4.2% yield), packaging firm DS Smith (4.8%) and banking giant HSBC (4.4%).
I’d aim to build a portfolio of 15-20 stocks, spread across different sectors of the market. However, I wouldn’t buy any FTSE 100 shares without doing my own research and understanding the risks facing each company.
Overall, I’d be excited to have the chance to invest a lump sum in the FTSE 100 today. I think there are some good opportunities, despite the uncertain outlook.