So far, 2024 has been a good year for the flagship FTSE 100 index. It hit a new high earlier this year and, although it is no longer at that level, is still 7% higher than where it was at the beginning of January. That represents more than half the five-year gain of 13% in the index. What about the smaller FTSE 250?
It too, has gained so far in 2024. Indeed, it us up by 6%.
Over five years, though, the index of small and medium-sized companies has actually fallen, albeit by a modest 1%. Still, a fall is a fall – and certainly not what I look for as long-term investor.
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Price gain and dividend streams
This year’s performance means that, if I had put £20,000 into the FTSE 250 at the start of the year (for example, by investing in an index tracker fund), my investment should now be worth around £21,117.
On top of that, the current yield of the index is about 3.4%. If I had bought at the start of the year, the lower price means that I would now be earning a slightly higher yield of around 3.6% per year. I would now be sitting on close to 11 months’ worth of dividends, depending on the ex-dividend and payment schedule of the shares I bought.
Over a 12-month period, that yield on a £20k investment ought to be around £720.
That equates to almost £14 per week on average of passive income, an amount I could seek to raise by compounding the dividends.
What’s been holding the FTSE 250 back?
Over one year, the performance here has been decent but not outstanding. Over five years, I think it has been disappointing.
One reason people invest in a smaller index is that it contains companies that are up and coming. They might have more growth potential than the large, established beasts of the FTSE 100.
I think there can be some truth in that. But when the economy goes through turbulent periods, as it has in the past five years, smaller firms can find it harder to adapt than massive blue-chip businesses with deep pockets.
Not all FTSE 250 firms are great growth stories, in my view, or at least not when the question is whether I want to invest in them.
Take Ocado (LSE: OCDO) as an example.
The share has crashed 55% so far this year. The resulting collapse in market capitalisation means that the former FTSE 100 member was relegated into the City’s second division in the summer.
Over five years, the share has lost three-quarters of its value.
It does have strong growth prospects, not only for its grocery business but also the services it provides worldwide enabling other retailers to fulfil online orders. Indeed, the retail business saw sales revenue grow 11% in the first half of the year compared to the same period last year, while technology solutions revenues surged 22%.
So, why has the Ocado share price slumped?
It remains consistently loss-making and heavily cash burning. As an investor, I don’t just like growth – I like profitable growth. For now, I see a risk Ocado will keep making big losses scaling its costly fulfilment centre network, so I will not be buying the share.
