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While there may be lots of doom and gloom surrounding the British economic outlook, that is not obvious from the performance of the FTSE 100 index of leading UK shares.
This week, the FTSE 100 hit a new all-time high. Over the past five years, it has grown 49%. That is well below the 98% increase in the US S&P 500 index over that timeframe.
But I think 49% growth in five years is creditable performance. On top of that, the FTSE 100 dividend yield of 3.3% is significantly higher than the 1.3% of the S&P 500.
I already own some FTSE 100 shares. Ought I to invest some more money now to try and benefit from the potential for further future growth?
Still lots to like
I think the answer is yes. In fact, this week I sold some of my holding in one FTSE 100 company to take advantage of rising prices by banking some profits — then invested in another of the index’s well-known names.
Note that I am investing in individual FTSE 100 shares, not trying to “buy the index” overall, for example by investing in a tracker fund.
One potential benefit of investing in such an index-tracking fund is that, for better or worse, it ought broadly to perform in line with the index it aims to track.
So for example, I recently bought WPP (LSE: WPP) when its share price had fallen a lot – but it has since fallen even more!
The share is a bigger percentage of my overall portfolio than it is of the FTSE 100, so that fall has had a greater impact on my portfolio than it has had on a typical FTSE 100 tracker.
The opposite is true too though. One individual share that does well may have limited impact on the overall FTSE 100 index, but it can move the needle as part of my portfolio that contains far less than 100 shares.
I continue to think that, even after the recent all-time high, there are some potential bargains within the FTSE 100 index.
Trying to understand what drives long-term value
To illustrate, let me go back to WPP. It recently fell to a level last seen in 2009.
Dividend yield is a function of dividend per share and share price. So that dramatic fall had the effect of pushing the WPP dividend yield up to 9% — the highest of any FTSE 100 share right now.
No dividend is guaranteed to last though. WPP cut its payout in 2020 and the share price crash lately points to wider concerns that could hurt the dividend and share price. Artificial intelligence (AI) threatens to replace much of what the ad agency network currently does, hurting both revenues and profits.
Then again, WPP has extensive ad experience and human creativity that AI lacks. It has deep existing relationships with large numbers of clients.
If AI really is coming for the ad industry in a big way, the WPP share price might fall even further from here. But if such fears turn out to be overstated, I think the current share price could be a long-term bargain. That is why I have been buying.
