Of all the different methods of building long-term wealth, investing in cheap shares is my favourite. Some people buy-to-let, which can be lucrative. Not for me though. I think that buying under-priced UK shares is a brilliant way to generate long-term capital growth and income.
When starting out, many people in their 20s or 30s see buying shares as a risky way of making a fortune or losing it. Done properly, it’s nothing of the sort.
The FTSE 100 is crammed with blue-chip companies that boast a long track record of serving customers and building profits. Many are household names, like Aviva, Barclays, BP, Taylor Wimpey and Vodafone. They’re not here today, gone tomorrow operations.
Taking my time
They’re not going to make me a fortune overnight. I’m investing in a spread of stocks like these to build my retirement savings slowly, but steadily. The best FTSE 100 dividend stocks yield anything between 4% and 10% a year. I invest every penny today to build up my stock holdings. Later, when I stop working, I’ll draw the dividends as income and leave my capital largely untouched.
Many of these companies are really, really cheap right now. The market has been through a bumpy three years, with Covid, the energy shock, cost-of-living crisis. Values look beaten down to me.
At some point, economic conditions will ease and investor sentiment will pick up. I’m building up my portfolio of shares today, before that happens. It’s always best to invest before a recovery, rather than afterwards, when everything is more expensive.
Today, fund platform Hargreaves Lansdown looks nice and cheap, trading at just 10.2 times earnings (a figure of 15 is seen as fair value). It yields a healthy 5.93%. It’s on my shopping list, just below miner Rio Tinto, which is even cheaper trading at 8.4 times earnings. It yields 7.14% a year.
I’ve just topped up my stake in housebuilder Taylor Wimpey. It looked irresistible trading at 6.7 times earnings and yielding 8.45%. Yes, the housing market is in trouble, but surely not that much trouble? We’ll see.
Assess the risks
Blue-chip stocks can still be volatile. Capital is at risk. The Hargreaves Lansdown share price is down 17.92% over one year, and a thumping 62.72% over five. I didn’t buy it five years ago, because I thought it looked expensive trading at around 28 times earnings. Today’s lower valuation offers something of a safety net.
Dividends aren’t guaranteed, of course. Rio Tinto halved its shareholder payout at the start of the year. Yet it’s still on course to deliver a healthy rate of income. Rio’s share price may not recover until the global economy, does. I’m willing to give it time.
I’ve become an accidental buy-to-let investor. It wasn’t my plan. The effort involved is huge, and I haven’t even found my first tenant yet. I think that buying cheap shares is so much less bother. If I had no long-term savings at 30, that’s where I’d start.
