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When looking for ways to obtain high returns from FTSEI tend to look for stocks that pay dividends. There are 350 stocks in the two major indexes, about half of which pay a significant dividend.
The average performance of the FTSE 100 is 3.5% and in the FTSE 250 is 3.3%. However, the 250 currently has three stocks with returns greater than 10%, while the main index has none. Additionally, the smallest index houses around 40 stocks that do not pay any dividends, while the 100 only houses three dividend-free stocks.
So what does this tell me?
Smaller companies tend to focus on reinvesting funds to develop the business rather than paying them out to shareholders. Many larger, more established companies aim to retain existing shareholders and attract new ones through dividends.
This suggests that larger companies are probably more reliable at earning dividends. However, there is more to consider when looking to reap the benefits of both growth and income.
Growth and stability
High returns are only attractive if they are consistent and reliable. Weak performance could cause the share price to fall, negating any value gained from the dividends.
A reliable, income-focused company typically maintains a stable price and aims to increase dividends annually. But in some cases, even more value can be extracted from smaller, more promising companies.
Take the FTSE 250 financial services company as an example. TP ICAP (LSE: TCAP), for example. It has a yield of 6.4%. Over the past four years, it has increased its full-year annual dividend from 6.99 pence to 14.8 pence per share. Admittedly, the increase follows a 53% reduction in 2020. Still, many companies implemented similar cuts and have not recovered as quickly.
But that's not all. TP ICAP not only managed to allocate funds for dividends but also managed to grow the business. Since hitting a low in mid-2022, the share price has grown 125%. Therefore, it acts as an income stock and a growth stock.
Identifying the value
There is no sure way to identify these opportunities, but there are signs to look for.
TP ICAP released an impressive set of interim results in June 2022. Following the results, its price-to-earnings (P/E) ratio fell sharply. By then, it had already increased dividends by more than 30% in each of the previous two years. The company also moved to Jersey that year to reduce the group's capital requirements, helping it free up £100m to pay down debt.
At that time, the share price had fallen 70% since 2020. They were selling at a bargain price and strong results fueled growth. Persistent inflation held the price in check throughout 2023, but this year's economic recovery caused it to soar again. However, inflation remains a risk for the business.
risk assessment
Identifying factors like these can give a better idea of a company's prospects. Of course, an evaluation can only predict so much. Several additional factors could have derailed TP ICAP's performance over the past two years.
As an intermediary broker for European companies, it is very sensitive to economic changes and currency fluctuations. This can hurt the company's results even when it is performing well. The UK has also recently experienced strict regulatory changes, which has increased expenses for financial firms and added additional compliance risks.
Building a diversified portfolio of high-value companies in different sectors can reduce exposure to these industry-specific risks.