Over the last couple of decades, the average return from FTSE 100 shares has been around 6.5% a year. That’s enough to turn a £1,000 monthly investment over 30 years into £1,000,000.
The UK index is better known for its dividend stocks than its growth companies. But I think there are some really attractive opportunities for investors looking to build wealth over time.
Looking for stocks to buy
The FTSE 100 might have managed a solid annual return for the last 20 years, but there’s no guarantee that will continue. In fact, I think investors should be wary about expecting something similar ahead.
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Since 2004, interest rates have mostly been falling or below 1% and this has been a big part of why share prices have done so well. It’s much less certain this will be the case going forward though.
That’s why I’m looking for stocks that are going to be able to do better than the average for the index. And I think Diploma (LSE:DPLM) is one such company.
The FTSE 100 conglomerate is made up of businesses that focus on the distribution of industrial components. It has achieved some impressive results recently and I expect this to continue for some time.
Growth
Diploma’s strategy for growth has two parts. The first involves acquiring other businesses and the second involves using its framework to increase their revenues and profits.
In looking for acquisitions, the company focuses on three areas – controls, seals, and life sciences. Specifically, it looks for businesses that have dominant positions in niche industries, making them difficult to disrupt.
Businesses can benefit from being part of Diploma’s network in a number of ways. This might involve making their operations more efficient, expanding their distribution, or professionalising their operations.
Over the last five years, this has resulted in an average of 20% revenue growth and similar increases in operating income. That’s why the stock is up over 200% since the start of 2019.
Risks and rewards
With a stock like Diploma, there are two main risks. One is that the company might overpay for an acquisition and the second is that it might run out of growth opportunities.
The two are related – running out of opportunities increases the risk of making a mistake by overpaying. But there are a couple of reasons for investors to be optimistic.
One is the fact that the company is actually growing faster under its new CEO. Revenue growth has accelerated from 14% a year between 2014 and 2019 to 22% a year since 2020.
The other is that the company is still relatively small. With a market-cap around £5bn, there should be opportunities for growth available for some time yet.
The road to £1,000,000
The average annual return from the FTSE 100 over the last couple of decades is around 6.5%. Someone who invests £1,000 each month at that rate becomes a millionaire after 30 years.
I think Diploma is a better business than the average FTSE 100 company. So it could well be the case that my next £1,000 investment is in 28 Diploma shares.
