When searching for ways to earn high returns on the FTSE, I tend to look for stocks that pay dividends. There are 350 stocks across the two main indexes, approximately half of which pay a meaningful dividend.
The average yield on the FTSE 100 is 3.5% and on the FTSE 250 is 3.3%. However, the 250 currently boasts three stocks with yields above 10%, whereas the main index has none. Moreover, the smaller index hosts about 40 stocks that pay no dividend at all, whereas the 100 only hosts three dividend-free stocks.
So what does this tell me?
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Smaller companies tend to focus on reinvesting funds into building the business rather than paying them out to shareholders. Many larger, more established companies aim to retain existing shareholders and attract new ones via dividends.
This suggests that larger companies are probably more reliable for dividends. However, there’s more to consider when looking to harness the benefits of both growth and income.
Growth and stability
High yields are attractive only if they’re consistent and reliable. Weak performance could lead to a falling share price, that would negate any value earned from dividends.
A reliable income-focused company typically maintains a steady price and aims to increase dividends annually. But in some cases, even more value can be extracted from smaller, up-and-coming businesses.
Take the FTSE 250 financial services firm TP ICAP (LSE: TCAP), for example. It has a 6.4% yield. Over the past four years, it’s increased its annual full-year dividend from 6.99p to 14.8p per share. Admittedly, the increase follows a 53% reduction in 2020. Still, many companies enacted similar cuts and haven’t recovered as quickly.
But that’s not all. Not only has TP ICAP managed to allocate funds toward dividends, but it’s also managed to grow the business. Since hitting a low in mid-2022, the share price has grown 125%. So it’s acting like both an income stock and a growth stock.
Identifying value
There’s no surefire way to identify such opportunities but there are signs to look for.
TP ICAP released an impressive set of interim results in June 2022. Following the results, its price-to-earnings (P/E) ratio fell sharply. By then, it had already increased dividends by more than 30% in each of the previous two years. The company also redomiciled to Jersey that year to lower its group capital requirements, helping it free up £100m to repay debt.
At that point, the share price had fallen 70% since 2020. It was selling at a bargain and the strong results ignited growth. Stubborn inflation suppressed the price throughout 2023 but economic recovery this year sent it soaring again. Yet inflation remains a risk for the business.
Risk assessment
Identifying factors such as these can give a better idea of a company’s prospects. Of course, an assessment can only predict so much. Several additional factors could have derailed TP ICAP’s performance over the past two years.
As an intermediary broker for European companies, it’s highly sensitive to economic changes and currency fluctuations. This can hurt the company’s bottom line even when performing well. The UK has also undergone strict regulatory changes recently, ramping up expenses for financial firms and adding additional compliance risks.
Creating a diversified portfolio of high-value companies in different sectors can reduce exposure to such industry-specific risks.
