Here’s why investing in the FTSE 250 could be perfect for your pension

Worried about the State Pension not being enough? Investing in the FTSE 250 (INDEXFTSE: MCX) could help top it up.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A State Pension of £164.35 per week is not going to leave you in the lap of luxury. That’s why millions are investing for themselves via SIPPs and ISAs, but where should you put your pension cash?

Top-quality FTSE 100 companies are often recommended, and I would not disagree. After all, it’s a selection of the currently most successful British companies, and some of them are huge. Royal Dutch Shell, for example, is valued at nearly £220 billion, and it hands over huge amounts in dividends every year.

If you pick one from each of a handful of sectors, like big oil, banking, pharmaceuticals, utilities and so on, you could quickly lay the bedrock of a solid decades-long portfolio.

But that’s no reason to shy away from the FTSE 250, the index of the next 250 smaller stocks after the big 100. Admittedly its total value is a lot smaller, but it holds what I reckon are some very attractive long-term investments, offering income and growth potential.

Big dividends

House-building is out of favour now, but Crest Nicholson is currently on a forecast dividend yield of 9%, which would be well covered, and its shares are valued in a very low P/E multiple of around six. The rapid earnings growth of the sector has come to an end, but these shares are surely priced for an expected housing collapse (which I really can’t see happening).

For a bit of diversification, there’s Man Group, enabling small investors to get into hedge fund investing. Man Group’s year-by-year earnings can be a little volatile, but the shares are offering a 5.6% forecast dividend yield this year. And the shares have nearly doubled in five years, against the FTSE 250’s overall 35%.

Right now I see a tempting prospect in Dunelm Group, whose full-year results last week made the company look to me like it’s set to bounce back from a few tough years. The retail sector is still in a very tough spell, but Dunelm’s likely 5% dividends look good to me.

Recovery and growth

The FTSE 250 is home to some interesting oil companies too, like Premier Oil and Tullow Oil. Both were severely punished by the oil price slump and their heavy debt burdens came close to seeing them off completely. But you might like their prospects now that the price of a barrel is looking a lot healthier.

And if oil companies themselves are too risky for you, oil service firm Petrofac might look safer. It offers services to big oil companies and had also been hit by the price crisis, but it’s another that’s seeing a share price recovery.

Motor insurance firm Esure Group shares have recently jumped after a bid approach, but we’re still looking at decent growth characteristics and a relatively low P/E valuation. Prior to the bid news, the shares looked very cheap, and that tells me that FTSE 250 bargains can be easily overlooked. 

Past performance

One thing I would caution against is comparing the recent track record of the FTSE 250 against the FTSE 100. Over five years, the smaller index has approximately doubled the giant’s performance, but that can easily reverse. After all, the FTSE 100 is where the big banks are, and they’ve held it back.

But I really do think the FTSE 250 offers some very attractive pension investments.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares of Premier Oil. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »