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Experts offer many reasons why FTSE 100 lags behind US indices such as S&P 500. And I'm sure some of them make sense.
One is that more of the world's top growth stocks are listed in the United States. A few, however, will be in the Nasdaq.
But it cannot just be a national or international issue. After all, most FTSE 100 stocks are as global as the rest.
Why the FTSE 100?
It might seem like we're better off buying US stocks to try to build a nice retirement fund. After all, if UK shares grow more slowly, we'll end up with less cash, right?
If I say wrong, it all comes down to dividends. When stock valuations are lower, that helps increase dividend yields.
We expect to be net buyers of stocks for a couple more decades, don't we? So low valuations and high yields must be better, right?
I mean, the FTSE 100 dividend yield is currently at 3.8%. But it's as low as 1.3% for the S&P 500. It seems clear which of them is more likely to generate more cash to buy more shares.
Better yields
Let's look at the banks. All the FTSE 100 banks seem super cheap to me and offer good dividends. I have bought some Lloyds Banking Group Share. And I might add NatWest Group (LSE: NWG) to my stocks and Shares ISA this year.
At NatWest, we expect a future price-to-earnings (P/E) ratio of less than seven, with a dividend yield of 6.8%.
I'll choose a US bank at random (well, because I like the name), Wells Fargo. There we see a P/E of 12 and a dividend of 2.5%. That's almost double the valuation and less than half the dividend cash.
One of them seems like a better value for a long-term purchase.
Banking risk
The UK government's big bet is surely part of the reason NatWest shares have fallen. And I hope it reduces the price until it sells. I would even say it could be holding back UK bank valuations a bit.
Then we've got a technical recession here, fears of higher interest rates for longer… all of which could add up to a few bearish years for FTSE banking shares.
But all that is short term. And I can't imagine a bank like NatWest being anything other than a long-term investment success.
Other dividends
I have chosen Barclays as a stock that appears undervalued compared to the US markets. But I also have my eye on insurance companies, like Aviva (which I have) with its 7% dividends, and Legal and general at 8.2%.
In fact, I count a dozen FTSE 100 companies offering dividends of 6% or more. I don't trust all of them. So I would only choose those with good earnings coverage and decent cash flow expectations.
But buying stocks with undervalued dividends, in a stock index that looks very cheap… that's my way of aiming for a comfortable old age.
