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