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He FTSE 100 has been on a hot streak, racking up over 1,200 points since early October to break the 8,000 barrier for the first time.
It’s up 6.91% in 12 months and it’s up 5.17% year to date alone. This is well below the standards set by US tech stocks during their golden run, but impressive given the strong headwinds out there.
Rise of the Blue Chips
The London index of major blue chip stocks has downplayed the war in Ukraine, the energy shock, China’s lockdowns and rising inflation and interest rates. It has outperformed most of the global markets, for example, the US. S&P 500 continues to drop more than 10% in one year, with the nasdaq fell 17.57%.
I have been enjoying the rally in the FTSE 100. In October I decided it was too cheap to ignore and bought undervalued stocks which have since risen intelligently.
At the time, buying shares of the FTSE 100 was a no-brainer. It was packed with major stocks that were trading at less than 10 times earnings and yielding between 5% and 9%. But is today still a good time to buy FTSE 100 shares?
While many stocks are more expensive than they were a year ago, some have barely budged. barclays shares were up just 0.69% at the time. Insurer Legal and General Group has increased by 0.85% over the same period. Builder Barratt developments crashed 20.47%. vodafone has dropped 22.39%.
That’s the beauty of buying individual stocks instead of an index tracker. They behave differently and offer investors like me different things at different times.
When stock prices rise, returns automatically fall. That’s because they are calculated by dividing the dividend by the share price. However, I can still spot some surprising returns in the FTSE 100.
Major Dividend Stocks Get Cheap
Of the above list, Barclays is expected to return 5.7%, covered 3.7 times by earnings. L&G’s forward yield is 7.91%, with a 1.7x hedge. Barratt’s forward yield is 7.56%, very well hedged twice. Vodafone yields 9.1%, but with a very fine coverage of only 1.1 times.
These stocks are also very cheap, with Barclays trading at 5.7 times earnings, L&G valued at 7.52, Barratt at 5.4 times and Vodafone at 10.2 times.
Just because a stock is cheap doesn’t mean now is a good time to buy. You could be walking into a value trap and need to examine the company’s accounts carefully. Here we could see how sustainable its earnings are, whether it generates enough cash to fund dividends, and what threats it might face from new market entrants.
I think now might be a good time to buy Barclays, L&G or Taylor Wimpey, but I’m wary of Vodafone. While some of my fellow Fool writers admire this Dividend Aristocrat, I also like the prospect of generating capital growth. Vodafone’s share price hasn’t gone anywhere for two decades.
I have no idea where the index will go from here (although I suspect it might float a bit). I wouldn’t buy a tracker today, but I would buy individual shares of the FTSE 100.
Time to add Barclays, L&G and Taylor Wimpey to my wish list.
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