I reckon it’s possible to invest your way to a fortune with FTSE 100 stocks. And £10k is enough money to pack a punch. Invest it wisely, and you could make a big difference to your retirement pot down the road.
The biggest FTSE 100 stocks aren’t always the best
People often think of the largest names in the FTSE 100, companies such as mega miner BHP, banking goliath HSBC, and oil major BP. Those firms all weigh in with market capitalisations well above £50bn. They are huge enterprises. But big isn’t necessarily best when it comes to the investment opportunity.
Of course, size alone is no reason to reject a share. For example, I reckon consumer goods operators Unilever and Reckitt Benckiser are attractive because of their consistent cash-generating qualities. And so is premium alcoholic drinks supplier Diageo. All three of those companies could make decent compounding machines in your portfolio. You could hold for the long term and plough all your dividend income back into the shares along the way.
However, I’d be less inclined to attempt to compound my gains with those big cyclical beasts BHP, HSBC and BP. Their fortunes tend to wax and wane along with the wider economy. Over a long holding period, I think you’d see periods when the share price is on the floor. You may even experience a famine of shareholder dividends at times. Indeed, companies like that are more than capable of slashing, or even halting, their dividends for long periods.
Opportunities in the lower reaches of the index
But there are some good opportunities further down the FTSE 100 index where market capitalisations are lower. Indeed, I reckon smaller companies have more room to grow. And the lower reaches of the index can be a dynamic place.
For example, firms in the index with declining underlying businesses tend to end up near the bottom before being ejected completely. But up-and-coming businesses having been recently promoted into the big-league index tend to start near the bottom. And they can keep on growing from there.
So the bottom half of the FTSE 100 index can be a well-stocked hunting ground for long-term investing opportunities. For example, I like the look of international distribution and services company Bunzl, and speciality chemical company Croda International. Both have proven themselves to be solid dividend growers over a multi-year period. I think they may go on to repeat that trick in the years and decades ahead.
Meanwhile, business software and solutions company Sage is well advanced in the process of migrating its customers to cloud-based services. Revenues are ‘sticky’ and the business is good at generating the kind of consistent cash flow that supports shareholder dividends. I’m also keen on paper and packaging producer Mondi, which looks well placed in today’s world. To me, the business has many defensive qualities and opportunities for growth ahead.
By doing your own research, you’ll probably find other decent potential investments among the smaller companies in the FTSE 100. I’d spread my £10k investment between around five carefully selected stocks.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Croda International, Diageo, HSBC Holdings, and Sage Group. 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.