Picture supply: Getty Photos
As a veteran investor, I’m all the time searching for undervalued shares. Additionally, as an earnings investor, I’ve constructed a diversified portfolio of dividend shares. And there’s no scarcity of each sorts of share within the UK’s FTSE 100 index.
US shares look expensive
Nevertheless, most of my household portfolio — and our greatest winners — is in US shares. That’s partly as a result of the US market accounts for roughly two-thirds of worldwide fairness capitalisation. Moreover, US shares have outperformed UK shares for the reason that world monetary disaster of 2007/09. However the S&P 500 and Nasdaq Composite indexes look more and more costly to me right this moment.
The S&P 500 is valued at 25.3 instances trailing earnings, delivering an earnings yield beneath 4%. This locations it within the high 1% of its historic valuation vary, so it’s priced with no room for error. Additionally, its dividend yield of 1.2% a yr is lower than money yields of different main markets.
Likewise, the Nasdaq Composite appears extensively overvalued to me. It’s priced at 32.7 instances historic earnings, for an earnings yield of three.1%, whereas its dividend yield is beneath 0.7% a yr.
Conversely, the FTSE 100 is effectively beneath earlier valuation peaks. Certainly, it appears undervalued, each in historic and geographical phrases. It trades at 14.2 instances earnings, for an earnings yield of seven.1%. And the dividend yield of three.3% a yr is among the many highest in world inventory markets.
However why purchase UK shares, when US shares have outperformed them? As a result of you don’t purchase a share’s previous efficiency; you purchase solely its future. When traders purchase monetary property at sky-high costs, historical past suggests they may earn inferior future returns. Thus, I see the FTSE 100 as a greater guess for the following decade than extremely priced American shares.
Additionally, right here’s one thing mildly attention-grabbing: the FTSE 100 has returned 17.3% over the previous 12 months, versus 17% for the S&P 500. Which will shock some traders, however not me. As as to if this latest development will proceed, who is aware of?
A FTSE discount?
Rio Tinto (LSE: RIO) is likely one of the world’s largest mining firms. As an Anglo-Australian enterprise, its shares are listed on the London and Sydney inventory exchanges.
Rio Tinto (Spanish for ‘red river’) digs up, processes, and sells mined commodities in over 35 nations. It’s a main supplier of iron ore, copper, aluminium, and different minerals and supplies. Alas, world commodity markets are sometimes risky, in addition to transferring in multi-year cycles as demand and provide change.
Rio Tinto’s share worth is equally risky. Over the previous 12 months, it has ranged from a excessive of 5,474p on 30 September 2024 to a low of 4,024.5p on 9 April 2025. As I write, the shares commerce at 4,904.5p, valuing the group at £82.9bn — a FTSE 100 large. Over one yr, the share worth is down 7.4%, whereas it’s up 4.3% over 5 years (each excluding dividends).
For me, Rio Tinto inventory seems a discount, buying and selling on simply 10.3 instances earnings and providing a wholesome dividend yield of 5.8% a yr. Few FTSE 100 shares have such engaging fundamentals, however this enterprise has a historical past of slashing dividend payouts in troublesome markets. Even so, if my household portfolio didn’t already personal this inventory, it might be a part of my purchase listing right this moment!
