Why the FTSE-100 Can Top 7,000

05/31/2013 7:00 am EST


Rising dividends and falling yields...it's a classic double-whammy income rally, writes Maynard Paton of The Motley Fool UK.

I've blown up the balloons, put on my paper hat, and poured a celebratory glass of champagne. The reason?

Last week saw the FTSE-100 surpass its 2007 peak to close at its second-highest level ever. All we need now is another 200 points or so, and the index will breach its 6,930 all-time record set at the end of 1999.

Yep, we've suffered more than 13 years of hurt, during which the market has crashed 50% twice. So it's high time we had something to cheer about.

This year has been wonderful for shares. Worries about fiscal cliffs, Eurozone recessions, Italian elections, Chinese downturns, triple-A downgrades, and Cypriot bank runs...

...all have been washed away by rising investor confidence. In fact, assuming this year's 14% market surge continues, I reckon a new FTSE high could be achieved on Thursday, June 13...

...while breaching 7,000 could occur on June 26.

Make sure you circle those dates in your diary for your own celebration—just in case. Me? I'll be leading Fool HQ's office conga, complete with paper hat and fresh glass of champagne.

It makes sense for the market to hit new highs. True, some argue this rally has been supported by central banks printing money to keep the global economy going. And there'll be occasional setbacks, such as heavy Japanese selling causing the occasional 100-point drop. But at least there are some fundamentals to back a fresh market high.

In particular, companies in general seem to be doing well—well enough, in fact, to push their dividends to an all-time peak. You see, the annual payout from the iShares FTSE-100 ETF (ISF) has just topped its previous high set during 2008-2009.

The blue-chip payout progress has been assisted by the likes of BP (BP) and HSBC (HBC), both of which have signaled double-digit dividend lifts of late. Indeed, payouts from that iShares ETF indicate FTSE dividends have advanced a super 11% since this time last year.

This has encouraged confident investors wanting healthy yields to pay that bit extra for reliable income. In fact, this time last year, investors demanded a 4% yield from the FTSE when it traded around 5,300. But these days, investors are happy to collect 3.3% from the index.

So, rising dividends plus falling yields—it's been a classic double-whammy income rally.

But all parties have to come to an end, don't they? Indeed, on the two occasions when the FTSE previously traded so close to 7,000—during 2000 and 2007—vicious bear markets promptly savaged investors.

Well, I can't rule out my conga line disbanding, my champagne going flat and another full-on share slump. But I fully expect the FTSE-100 to blast past 7,000 before there's another major setback.

I call it my "shoeshine test"—based on that old story of shoeshine boys giving out stock tips just before the Crash of 1929. Essentially, when the masses become "experts," us Fools know there's trouble coming and it's time to sell.

But as far as I can see, this year's rally has yet to capture the public's imagination.

You see, I remember that peak of 1999, when tech stocks seemingly doubled every week—and sensible people ditched their jobs to daytrade for a living. And we should all still remember 2007, when banks were giving away money—and everybody became a property developer and profited from nonstop house-price rises.

None of that madness is happening right now. In fact, I'm sure the average person doesn't even know the FTSE is a whisker away from a new high. That tells me neither the market nor the economy is verging on the precipice once again.

This shoeshine test may not seem like a sophisticated approach, but zigging while the masses are zagging has always worked for me.

The masses aren't interested in shares, which means switched-on Fools such as you and me should stay invested. But booming share prices will sooner or later attract mainstream attention—as they always do.

And perhaps a new FTSE high will start the ball rolling. Indeed, I'm convinced crossing 7,000 will take that day's market report from the business pages straight to the front pages and wider public. That could be just the beginning, too.

Assume dividends grow by 6% a year and the market's yield drops to 3.2%, the front pages could be celebrating FTSE 8,000 during 2015. Now that will call for another party (I'll have bought more balloons by then).

Of course, none of us should wait until the FTSE hits 7,000 or 8,000—or even 10,000—before we plough into the market. I feel we should buy now, while the going looks firm—but before the masses pile in—to help give us the best chance of riding share prices even higher.

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