When I think of investing in the stock markets for the long term, I have two objectives in mind. The first is that I expect to see substantial capital gains, so finding the right growth stocks is essential. I also like to see a steady build up in my dividend income, which can be reinvested into stocks.
Why buy FTSE 100 stocks?
As a rule, I like to start with FTSE 100 stocks because these companies tend to be stable, growing, and many of them have been around for a long time. From among these, I have a simple starting point for figuring out which ones can be the best long-term investments for capital gains. And that is, to consider where they have been in the past. If a stock has shown consistent gains over the last decade or so, that is a good sign to me. This step would eliminate a number of stocks.
Best stocks to buy for capital gains
From this list, I would figure out these stocks’ current situation. Ideally, they should be thriving companies, with growing revenues and profits. I am often willing to overlook profit growth, because a number of short-term reasons can lead to fluctuations in earnings, in my experience. And there are even promising growth stocks among FTSE 100 constituents that are loss-making. But typically, I like the stocks I hold to be profitable.
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On the surface, there is one apparent disadvantage to holding stocks with fast rising share prices. They are not great at paying dividends. But here is the catch. If they are thriving, it is possible that their dividends are growing too. It is just that since their share prices rise even faster, their dividend yields could look underwhelming. But over a 10-year period, the yields can look quite good too.
A recent example I talked about is the industrial equipment rental company Ashtead. Its share price has risen by more than four times over the last five years alone. And its impressive dividend growth has made its 10-year returns the best among all FTSE 100 stocks in terms of dividend yields. As a company that is closely linked to the cyclical construction sector, I do, however, have to watch out for any future slumps that might impact it.
The appeal of stable dividend stocks
I would also consider stable dividend stocks as well. Defensive stocks with well-defined dividend policies can be promising ones for me to hold. I like defensives because their earnings are relatively predictable. This means that even during downturns, I have better chances of earning passive income from them than other stocks. Not all, but some of them among the FTSE 100 constituents also have higher than average dividend yields. They have also seen capital gains over the years, so these could be good to hold in my portfolio as well.
Renewable energy producer SSE is one such stock I like now. It has a healthy dividend yield of 5.2%, compared to the FTSE 100 average yield of 3.4%. Also it is in a promising sector that is slated to grow. The stock has fluctuated quite a bit in the past few years, though.
And these are just two examples of rewarding stocks for me to put £10,000 in for a decade. There are plenty of others for me to choose from as well.
