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As a veteran investor, I’m always looking for undervalued shares. Also, as an income investor, I’ve built a diversified portfolio of dividend stocks. And there is no shortage of both types of share in the UK’s FTSE 100 index.
US stocks look pricey
However, most of my family portfolio — and our biggest winners — is in US stocks. That’s partly because the US market accounts for roughly two-thirds of global equity capitalisation. Furthermore, US stocks have outperformed UK shares since the global financial crisis of 2007/09. But the S&P 500 and Nasdaq Composite indexes look increasingly expensive to me today.
The S&P 500 is valued at 25.3 times trailing earnings, delivering an earnings yield below 4%. This places it in the top 1% of its historic valuation range, so it’s priced with no room for error. Also, its dividend yield of 1.2% a year is less than cash yields of other major markets.
Likewise, the Nasdaq Composite seems widely overvalued to me. It’s priced at 32.7 times historic earnings, for an earnings yield of 3.1%, while its dividend yield is below 0.7% a year.
Conversely, the FTSE 100 is well below previous valuation peaks. Indeed, it seems undervalued, both in historical and geographical terms. It trades at 14.2 times earnings, for an earnings yield of 7.1%. And the dividend yield of 3.3% a year is among the highest in global stock markets.
But why buy UK shares, when US stocks have outperformed them? Because you do not buy a share’s past performance; you buy only its future. When investors buy financial assets at sky-high prices, history suggests they will earn inferior future returns. Thus, I see the FTSE 100 as a better bet for the next decade than highly priced American stocks.
Also, here’s something mildly interesting: the FTSE 100 has returned 17.3% over the past 12 months, versus 17% for the S&P 500. That may surprise some investors, but not me. As to whether this recent trend will continue, who knows?
A FTSE bargain?
Rio Tinto (LSE: RIO) is one of the world’s largest mining companies. As an Anglo-Australian business, its shares are listed on the London and Sydney stock exchanges.
Rio Tinto (Spanish for ‘red river’) digs up, processes, and sells mined commodities in over 35 countries. It is a leading provider of iron ore, copper, aluminium, and other minerals and materials. Alas, global commodity markets are often volatile, as well as moving in multi-year cycles as demand and supply change.
Rio Tinto’s share price is equally volatile. Over the past 12 months, it has ranged from a high of 5,474p on 30 September 2024 to a low of 4,024.5p on 9 April 2025. As I write, the shares trade at 4,904.5p, valuing the group at £82.9bn — a FTSE 100 giant. Over one year, the share price is down 7.4%, while it is up 4.3% over five years (both excluding dividends).
For me, Rio Tinto stock appears a bargain, trading on just 10.3 times earnings and offering a healthy dividend yield of 5.8% a year. Few FTSE 100 shares have such attractive fundamentals, but this business has a history of slashing dividend payouts in difficult markets. Even so, if my family portfolio didn’t already own this stock, it would join my buy list today!
