It’s that time of year again.
The Christmas tree is back in the loft, New Years Eve is just a fading memory and many of us are foolishly trying to stay off the booze for a whole month. And, for those of you interested in picking up bargains, it’s time for the January sales.
Now personally I hate shopping, so I’m not one of those trawling the shops. But I am from Yorkshire, and we tend to be a little on the tight side — so I’ve always got my eye out for a good buy…
…and FTSE 100 shares may currently fit the bill.
After a pretty shoddy 2018 — which saw the index drop by 12.5% — the current price of many blue-chip shares definitely puts them in the sales aisle.
The average forecast P/E ratio of FTSE 100 shares is a lowly 12.6 with a correspondingly high dividend yield to match. There are plenty of examples of high quality shares trading on single digit multiples and with dividend yields north of five, or even six percent. In other words, a little digging around in the bargain bin, could turn up some great deals.
Interestingly, the market has made a good start to the new year, with the FTSE 100 nudging back up above 6,850. I think it’s way too early to say that the sales are over, but you wouldn’t want to miss out on the best picks.
So, the question is: Are UK blue-chips a screaming buy, or cheap for a very good reason?
I’ll come back to that in a minute, but first up, let’s have a quick look at the reasons behind the current slump.
Markets hate uncertainty and you can’t get much more uncertain than the current slow-motion train wreck, known as Brexit. Or more precisely, the daily soap opera our elected representatives are providing as they squabble about the exact nature of our departure from the EU.
On the rare occasions that it looks like a deal may be in the offing, the pound rallies, and any domestically focused stocks follow suit. On the other hand, when it looks like we are accelerating towards a no-deal cliff edge, sterling drops and those companies that earn much of their revenue abroad, do much better.
We still have no idea what’s going to happen over the next few weeks, but one distinct possibility is another general election.
That certainly seems to be Labour’s preferred route out of the current mess. And with bookies offering odds of 4/1 on comrade Corbyn becoming the next occupant of number ten, a far left government is a distinct possibility. And that, would definitely be bad news for many stocks.
Both Mr Corbyn and John McDonnell have stated that they intend to nationalise the water companies, energy suppliers, Royal Mail, and the railways.
Now, having been repeatedly subjected to the farce that now passes for my local train company — Northern — I might be inclined to agree with some of these policies. But as an investor, their ideas make me nervous, and I’m largely staying away from these shares.
And of course, being labour, they will want to raise taxes. They have already promised to put corporation tax up from 19% to 26% over their first few years in office. That would have an obvious knock on effect on profits and the corresponding dividends. And who knows what will happen to personal taxation for anyone they deem to be ‘rich’…
Add into this domestic turmoil the continued concerns of a US-China trade war, rate rises in the US, and slowing global growth, and it’s no wonder the markets have the blues.
So, what to do?
Well, first up, if you already own FTSE 100 shares and you’re a long term investor, don’t panic. Just sit tight and get on with your life.
And if you don’t, maybe it’s time to go shopping.
Personally, I think we could look back on this period as being a great opportunity to pick up some excellent income-generating stocks at bargain prices. The worst case scenario is that we end up with a no-deal Brexit and/or a Labour government. That’s not great, but both scenarios would cause the pound to plunge further, and therefore boost the three-quarters of FTSE companies’ earnings that come from abroad.
On the other hand, assuming that the muppets at Westminster finally get their act together, we could be looking at a substantial rally.
Of course, shares may still drop lower in the short term, but I don’t think you’ll go far wrong investing for the long run. Especially if you focus on the income. After all, I think it’s highly unlikely that any of the behemoths we’d pick, are going bust anytime soon.
And, as a long-term income investor, I have an advantage.
You see — unlike most traders — I’m not specifically looking to make money out of the short term gyrations in a stock’s price. Instead, I’m looking to buy big boring companies at good prices and to ‘lock in’ a great dividend yield.
As you know, there is always the chance that a dividend will be cut, but if it’s well covered and has a good historical track record, I’m happy to take that risk.
Over time you can just sit back and watch the dividends roll in. If you need the money, then it a great income stream. And if not, then you can simply re-invest the dividends back into more high-yield shares. You’ll be amazed at the power of compounding.
The best bit is that I really don’t care if the share price falls further in the short-term. It’s the dividends I’m really interested in. And, if I pick my stocks well — and buy them when they are cheap — there is every chance that the dividend will continue to grow over time and the stock price will recover.
Now, doesn’t that sound so much more relaxing than chasing the latest hot stock, commodity or crypto? I certainly think so.