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If you look where you always look, you’ll find what you always find

“Elephants don’t gallop,” the late Jim Slater famously observed.
 
And the legendary investor had a point: if you’re looking for stellar growth, then the upper reaches of the FTSE 100 aren’t the most obvious place to find it.
 
To be sure, the likes of Royal Dutch Shell – the FTSE’s biggest constituent, with a market capitalisation of £135bn – aren’t exactly dullards. But it’s simple common sense that companies such as BP (market capitalisation £110bn), HSBC (£135bn) and GlaxoSmithKline (£76bn) will struggle to deliver a sustained spell of growth at – say – 10% per year.
 
Much smaller companies – younger, and still increasing their market share – have much better prospects of delivering sustained double-digit growth.

Safety in size

So does this mean that investors should eschew the upper reaches of the FTSE, then?
 
Of course not.
 
These giants offer a reassuring sense of stability: like a supertanker, they sail serenely and predictably onwards, delivering few surprises. As a home for investors’ capital, they’re a reasonably safe haven.
 
More to the point, perhaps, investors investing in index trackers already own significant chunks of such businesses: Shell, HSBC, BP, AstraZeneca, Diageo, British American Tobacco – collectively, these giants make up a weighty proportion of any FTSE index tracker.
 
And that predictability extends to their charms for income investors, too.
 
True to their implicit ‘no surprises’ promise, the dividends from such businesses are predictable, too – sometimes, too predictable, as with GlaxoSmithKline and HSBC at the moment, which are delivering perfectly flat dividend growth.
 
To compensate: juicy yields. As I write these words, for instance, HSBC is on a historic yield of 5.9%, GlaxoSmithKline 5.2%, Shell’s ‘B’ shares 6%, and British American Tobacco 7.1%.

Big isn’t always beautiful

So are such shares where I think income investors should focus their capital?
 
No, of course not.
 
High yields – even from solid businesses – aren’t the only investing criteria to apply.
 
Consider diversification, for instance. The ten largest businesses in the FTSE include two of the world’s largest oil companies, two of the world’s largest pharmaceutical companies, an Asia-focused bank, a cyclical mining business – well, you get the point. Diversified, they ain’t.
 
Which is why my own income-focused portfolio ranges far and wide within the FTSE 100 and FTSE 250 (and occasionally beyond), looking for income, income sustainability, and income growth – and from as diverse a collection of companies and industries as possible.

Grabbing bargains when you can

That said, I’ll often do so opportunistically.
 

As I’ve written before, early-2016 was a great time to pick up beaten-down resource stocks – including Shell. Picking up some extra shares in Shell at £12.95, versus today’s price of £24.57, I was effectively locking-in a yield of 11.5%. BHP Group (formerly BHP Billiton) at £5.96? An effective yield of 14.8%.
 
Likewise, the depths of the financial crisis and ensuing recession was a great time to pick up engineering companies such as IMI and Weir Group.
 
And more recently, of course, there have been a number of opportunities, post-referendum, to pick up specialist property companies at attractive prices and good yields – giants such as British Land, certainly, but also relative minnows such as Tritax Big Box, Primary Health Properties, and Empiric Student Property.
 
More to the point, such businesses – IMI, Weir Group, Tritax Big Box, Primary Health Properties, and Empiric Student Property – are far removed from the upper reaches of the FTSE 100, both in terms of industry and market capitalisation.
 
At a stroke, then, investors grabbing such opportunities got decent yields and decent diversification.
 
And as combinations go, that’s a pretty decent pairing.

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Malcolm owns shares in Royal Dutch Shell, BP, HSBC, GlaxoSmithKline, AstraZeneca, BHP Group, IMI, Weir Group, British Land, Tritax Big Box, Primary Health Properties and Empiric Student Property. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, British Land Co, Diageo, HSBC Holdings, IMI, Primary Health Properties, Tritax Big Box REIT, and Weir.