As the FTSE 100 climbs, what bargain stocks are left?

Here’s a headline you won’t read on the front pages of the newspapers: “Footsie just fine, returns 14% over two years.

That’s total return, with a 6.3% rise in the FTSE 100 itself plus dividends averaging over 4% per year for the past two years.

And after a few weeks of bearishness, the index is picking up again and looks set to finish the week about 2.5% up.

It seems the talking heads of the City have decided, today, that we might actually get a Brexit deal, and that the US and China are perhaps not going to bankrupt each other with a tit-for-tat trade war after all.

Ignorance is bliss

Just suppose you’d stuck your money in a FTSE 100 tracker two years ago, and gone off to a desert island with no communication with the outside world. You’ve just got back, and all you’ve looked at is the value of your investment.

I imagine you’d be quite happy, in blissful ignorance of what’s been happening. That’s actually a great approach to investment, championed by Warren Buffett himself, and it does save a lot of needless stress.

But what did you actually do during the mini-crash of the past few weeks? Did you join in the sell-off, afraid we were heading for economic disaster? I hope not, as the Motley Fool’s approach is to do exactly the opposite — when the things you want get cheaper, don’t sell them, buy more.

What’s on special offer?

While Footsie shares are not quite as cheap as they were a week ago, what bargains are there still to be had? Personally, I’d focus on dividends, as these are good times for seeking income from shares.

The most recent Dividend Dashboard from AJ Bell says dividend cash handed out by FTSE 100 companies is forecast to grow by 10.6% for 2018 and by 5.5% in 2019. That’s way ahead of inflation, and suggests overall dividend yields of 4.3% and 4.5% for the two years respectively.

That’s above the Footsie’s long-term yield trend, and it does suggest to me that shares are cheap. But which dividend-paying stocks would I go for? Not necessarily the ones with the very biggest yields right now, as I want to see some safety in the form of decent cover by earnings.

I wouldn’t buy Vodafone for its forecast 9% yield, for example, as predicted EPS would only cover two-thirds of it — and I’ve no idea how Vodafone’s dividend strategy is supposed to make sense.

My safer picks

I don’t share the market’s fear of a housebuilder meltdown — however Brexit goes, we do still have a chronic housing shortage. Barratt Developments declared a total of 43.8p per share for the year ended June, including specials. That’s a yield of 8% on the current price, and even the ordinary dividend yielded 4.9% and was covered 2.5 times by earnings.

And I do like the look of BP, which stuck to its policy of maintaining its dividend right through the oil crisis. Forecasts suggest yields of around 6% for this year and next, and with the oil price now back above $70, we’re looking at cover by forecast earnings of better than 1.5 times for 2019.

Yes, I reckon a combination of dividend yield and dividend cover is probably the best way to find the FTSE 100’s oversold bargains right now.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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