The FTSE 100 isn’t just about dividend shares – it also has some companies with terrific growth potential. And investing in the stock market doesn’t require huge amounts of cash.
Despite UK shares often trading at a discount to US equities, these stocks often have high price-to-earnings (P/E) multiples. But for investors with a long time to retirement, they could be excellent investments.
No savings
The stock market can be a terrific place to invest cash for long-term returns. Over the last 20 years, the FTSE 100 has returned an average of just under 7% a year for investors.
That’s enough to turn a £10,000 investment into £40,387 over 20 years. But not everyone has that kind of cash to invest.
According to a survey from the Money and Pensions Service, around 16% of UK adults have no savings. While this rules out putting £10,000 in the FTSE 100 tomorrow, there are other ways of investing.
Even if I had no savings, I could use part of my income to invest in the stock market. And this could well result in better returns than a large one-off investment.
Investment returns
After 30 years, a £10,000 investment that earns a 7% return results in a portfolio worth £80,000. By contrast, a 7% annual return on a £900 monthly investment amounts to £1.1m after three decades.
It’s worth noting that the momentum picks up late in both cases. The £10,000 investment is only worth £40,063 after 20 years and the regular £900 investment only reaches £474,60 by this point.
This means someone starting investing at 30 has a really important asset – time. Being a long way from retirement gives returns time to compound and the longer they do this, the more spectacular they can be.
A long time to retirement also allows investors to take advantage of opportunities in growth stocks – shares in companies that are going to be worth more as their earnings increase. And there are some terrific examples.
Halma
Halma (LSE:HLMA) is a collection of industrial safety businesses with an outstanding track record of growth. Over the last decade, revenues have increased by an average of 10.5% a year.
Acquisitions are a key part of the company’s growth. But having acquired subsidiaries, the firm looks to help them expand, operate more efficiently, and continue to innovate.
There’s a risk Halma’s growth might slow as it grows. Traditionally, this happens to even the best conglomerates as acquisition opportunities big enough to make a meaningful difference to revenues become more limited.
Eliminating this risk entirely is impossible. But the company’s strong track record and focus on returns on invested capital is the mark of a firm that won’t easily make a mistake.
Investing in growth stocks
At a P/E ratio of 36, Halma shares aren’t cheap. And buying them is probably out of the question for anyone investing for passive income in the near future.
Over the long term though, I’d expect Halma to be one of the better-performing FTSE 100 shares. If I were going to invest regularly over a 30-year period to aim for a million, it would be a stock I’d be happy to buy.
