Experts offer many reasons why the FTSE 100 lags US indexes like the S&P 500. And I’m sure some of them make sense.
One is that more of the world’s major growth stocks are listed in the US. A good few, though, will be on the Nasdaq.
But it can’t be just a domestic or international thing. After all, most FTSE 100 stocks are every bit as global as the rest.
Why the FTSE 100?
It might sound like US stocks are better for us to buy to try to build a nice retirement pot. After all, if UK stocks grow more slowly, we’ll end up with less cash, right?
I say wrong, and it’s all down to dividends. When stock valuations are lower, that helps push dividend yields up.
We expect to be net buyers of shares for another couple of decades, don’t we? So low valuations and high yields must be better, right?
I mean, the dividend yield on the FTSE 100 stands at 3.8% right now. But it’s as low as 1.3% for the S&P 500. It seems clear which of those is more likely to generate the most cash for me to buy more shares with.
Best yields
Let’s look at banks. All the FTSE 100 banks look super cheap to me, and they offer good dividends. I’ve bought some Lloyds Banking Group shares. And I might add NatWest Group (LSE: NWG) to my Stocks and Shares ISA this year.
At NatWest, we’re looking at a forward price-to-earnings (P/E) ratio of under seven, with a 6.8% dividend yield.
I’ll pick a US bank at random (well, because I like the name), Wells Fargo. There we see a P/E of 12 and a 2.5% dividend. That’s nearly twice the valuation, and less than half the dividend cash.
One of those looks to me like better value for a long-term buy.
Bank risk
The UK government’s big stake is surely part of the reason NatWest shares are down. And I expect it to put a drag on the price until it’s sold off. I’d even say it might be holding all UK bank valuations back a bit.
Then we have a technical recession here, fears of higher-for-longer interest rates… it could all add up to a few bearish years for FTSE bank stocks.
But that’s all short term. And I can’t see a bank like NatWest being anything other than a long-term investing success.
Other dividends
I’ve picked out Barclays as a stock that looks undervalued compared to US markets. But I have my eye on insurance firms too, like Aviva (which I hold) with its 7% dividends, and Legal & General at 8.2%.
In fact, I count a dozen FTSE 100 companies offering dividends of 6% or better. I don’t trust them all. So I’d only go for ones with good cover by earnings and decent cash flow expectations.
But buying undervalued dividend stocks, in a stock market index that looks very cheap… that’s my way to aim for a comfortable old age.
This post was originally published on Motley Fool
