The FTSE 100 offers a diverse mix of companies, but I think some of the best potential for dividend income and growth can be found in the smaller firms listed in the index.
Rather than heading for the giant banks, oil firms, miners and pharmaceutical companies, with their well-known names and massive market capitalisations, I’m more likely to invest £2,000 into firms such as medical technology company Smith & Nephew (LSE: SN) and private equity and venture capital company 3i Group (LSE: III).
For example, Smith & Nephew’s market capitalisation is around £11.593bn, which is dwarfed by BP’s £93bn. However, a smaller size doesn’t make it a riskier investment. One of the things I like most about the company is the ‘defensive’ nature of its business. The products it produces include joint replacements for knees hips and shoulders, tools for minimally invasive surgery, advanced wound dressings and nuts, bolts, plates and nails for trauma surgery. Demand tends to remain strong whatever the economic weather, and I think that shows in Smith & Nephew’s financial record.
Since the autumn of 2011, the shares are up more than 130%, driven by generally rising earnings, dividends and cash flow. With the full-year results report in February, chief executive Olivier Bohuon told us that the firm “returned to double-digit growth in the Emerging Markets.” He expects 2018 to be “another year of improved performance” driven by a strong product portfolio and pipeline of “innovative” products.
City analysts following the firm expect earnings to grow 2% during 2018 and 7% the year after that. Such gains may not look big but a steady performance like that is what has pushed the shares up over the last few years. And I think there’s likely to be more of the same to come for investors in the years to follow.
Exposure to fast-growing smaller businesses
3i Group’s market capitalisation is even smaller than Smith & Nephew’s, sitting at about £8.87bn, a world away from GlaxoSmithKline’s £65bn, for example. But 3i’s trading record over recent years is outstanding and the shares have moved up more than 360% since early 2012. I really like 3i because its business model involves investing in smaller firms identified as having big potential for growth and helping them with expertise and capital to achieve that potential.
Once the investee business has blossomed, 3i typically sells out to realise a profit. In that way, we investors that buy shares in 3i can gain exposure to the fast-growing smaller-company segment via a diversified investment vehicle (3i Group) without taking on the risk of investing in individual smaller stock-market-listed companies. Back in February with its Q3 performance update, 3i said it had enjoyed “a positive quarter” and that the firm was “on track to deliver another year of strong growth.”
I reckon growth potential and dividends from these two FTSE 100 firms looks attractive and they could work well in a diversified portfolio to cover two different sectors. Smith & Nephew’s defensive characteristics could balance the exposure to smaller companies that you’ll get from 3i Group. For a £2,000 investment, I think these two are well worth your research time.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended BP. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.