Image source: Getty Images
Buy at FTSE 100 stocks mean getting a stake in some of the biggest companies in the country.
It might seem that this would necessarily be an expensive undertaking. In fact, some FTSE 100 stocks are underpriced compared to what I think they are worth. Not only that, but they also offer high dividend yields.
I see quite a few stocks of this type in the current market. This is how I find them!
Understand what value really means
To start, I look for companies I like because I think they have the potential to generate great profits in the long term. If I don't like the look of a company, it may not offer me value even if its stock price is low.
As an example, when ocado was in the FTSE 100, I reckoned it still had to prove its business could make money in the long term, given its high capital expenditure. I didn't invest and I wasn't alone. The company has since fallen from the main index, having fallen 70% in five years.
But even when I like a company, value means paying less than I think it's worth.
One approach may be to choose a business with a low price-to-earnings (P/E) ratio. But when doing that I have to keep a couple of things in mind.
I look at how sustainable the profits are. I also take into account how much debt (or cash) a company has on its balance sheet. After all, even if a company makes a lot of money, if it needs to use it to pay off debt, those profits may never reach shareholders.
High performance is not necessarily high risk
Therefore, a stock may seem like a bargain without actually being one. But some stocks, even those in the FTSE 100, offer good value and high returns without an unusually high risk profile.
As an example, consider the insurer Aviva (LSE: OFF).
The financial services powerhouse trades on a P/E ratio of just under 10. I think that's an attractive valuation for a company that has a large, proven business in a market that is likely to endure, a sizable customer base, strong brands and a proven reputation. business mode when it comes to generating excess cash.
All businesses carry risks and Aviva is no exception. In fact, it cut its dividend four years ago. Despite this, the dividend, which is now growing again, means that the insurer's shares currently yield 7.2%.
For a FTSE 100 company, I find this very attractive. In fact, it's about twice the average of the blue-chip index stocks.
Aviva strikes me as a stock that investors should consider buying considering its long-term potential.
