The return on UK investments topped almost every other country in the world last year, and 2023 could be even better.
Savers can get up to 4.50 percent on cash from a fixed-rate bond, but AJ Bell investment director Russ Mould says investors may get an even better return if they are willing to take on more risk.
They can do this by investing in the FTSE 100 index of top British UK stocks. It has underperformed for several years but in 2022 it fought back.
While New York’s Nasdaq Tech index plunged around 35 percent and most other markets fell, the FTSE 100 actually rose.
Those who think the index is still a “total duffer” are now behind the times, Mould said. “The FTSE 100 ranked third on the global stage in 2022, behind only India and Brazil.”
Britons who invest in the FTSE 100 through their annual £20,000 a year Stocks and Shares Isa allowance do not just benefit when the index rises in value.
Companies on the index also pay hugely generous dividends, which gives investors access to a high and rising income stream.
Last year, the FTSE 100 stocks listed on the FTSE 100 delivered an average yield of 4.1 percent, beating the vast majority of savings accounts.
Yet Mould says the total cash yield was much higher than that in practice.
Many FTSE 100 companies reward shareholders by using profits to buy back their own shares, which reduces the amount in circulation and boosts their value.
Mould says FTSE 100 members announced a record £55.2billion share buybacks in 2022, on top of £79.1billion in dividend payments and another £2.8 billion in special dividends. “Combined, that makes a total cash yield on the FTSE 100 of an impressive 6.6 percent.”
FTSE 100 stocks still look undervalued despite last year’s successes, and are cheap to buy as a result, he says. “Buying cheap stocks is the best possible way of getting good long-term returns.”
Stocks and Shares Isa investors could get even better returns in 2023.
Analysts reckon the FTSE 100’s pre-tax income in 2023 will be 71 percent higher than it was five years ago, as dividend payments fly to a new high.
Mould says it could even deliver an even higher total cash yield than this year, depending on share buyback levels.
The index could climb to a record high as well.
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Today, it trades at 7,871, having risen strongly so far this year. Mould says there could be more growth to come.
He reckons the FTSE 100 could hit an all-time high this year to end 2023 trading at 8,250. That would give investors a capital return of five percent, on top of that income yield of more than six percent income.
If correct, the total return from both income and growth over the year could be closer to 10 or 12 percent.
As ever when investing in shares, there are no guarantees. Second-guessing market movements is even harder than usual at the moment, Mould said. “War in Ukraine continues, inflation is yet to be tamed, central banks are still talking tough on monetary policy and there are forecasts of a long recession.”
Yet many of these risks are priced into today’s low FTSE 100 valuations.
The easiest way to invest in the index via an Isa is to buy a low-cost tracker fund such as HSBC FTSE 100 Index or the iShares Core FTSE 100 UCITS ETF.
As ever with shares, past performance is no guarantee of future returns, and nobody should invest for a period of less than five or 10 years.
For older savers in particular, savings accounts are the safer option, with some paying more than 4.50 percent and no stock market risk.