So the government is in crisis over Brexit, the Prime Minister is facing a vote of no confidence, economic forecasts for the UK are the weakest they’ve been for years, and the FTSE 100 has been hovering around around a two-year low for the past week.
It’s times like this that friends tell me I must be mad to invest in shares, and it’s hard to get them to understand that I actually want shares to fall in price so I can get them cheaper.
In his 2004 annual letter to Berkshire Hathaway shareholders, Warren Buffett famously said if investors want to try timing their actions, “they should try to be fearful when others are greedy and greedy only when others are fearful.”
They’re fearful
That’s great advice at the best of times, but the 14 years since has been one of the most applicable periods I can remember, as crisis upon crisis has pushed share prices down and presented unbelievable bargains. And every time, those who should know better have ended up panicking and selling their shares, often to buy back in when markets have settled… and prices are higher!
Buy low, sell high. Everyone knows that’s the obvious way to profit from the stock market, but why are we so emotionally geared to doing exactly the opposite?
Dividends
Even looking at movements in share prices misses what I see as the big attraction of buying top FTSE 100 shares — dividends. Right now, the average forecast FTSE 100 dividend yield stands at approximately 4.5%. And I showed recently how, if you simply choose 10 of the biggest shares in the index (while avoiding duplicating sectors), you could get an overall yield of around 5.8%.
That’s not guaranteed, but even if you get close to that you’ll still be beating most other forms of investment from dividends alone — and any long-term share price gains can be seen as a bonus.
Pension income
As part of my pension planning, I was looking at that long-term favourite, the annuity. An annuity gives you a guaranteed return, but the best I found was offering only 2.5% — and that was with the total surrender of your investment capital.
All you need from your FTSE 100 dividends is a yield of better than 2.5%, and you’ll beat even the best annuities, while still keeping your capital. And in the decades of my investing experience, FTSE 100 dividends have never failed to beat that, with total returns including share prices being significantly higher.
What should you do while all around are panicking? I say look at the bargains that are being thrown up by the FTSE 100‘s fall — and seek companies with reliable dividends, whose businesses should be safe for the next decade and beyond.
The best cash
Royal Dutch Shell is one of my favourites, and right now forecasts indicate a dividend yield of 6.1% for this year and next. Unlike during the depths of the oil price slump, it should be comfortably covered by earnings too. And if you fear for the safety of Shell’s dividend, remember that the company has not cut it even once since the end of World War II.
Whichever shares you prefer, the markets are certainly fearful now, which tells me it’s time to buy.
