If you’re aiming for, or already have, £1m in your portfolio, you need a good balance of stocks to avoid any potential sector-specific shocks that could seriously dent its value. I reckon the following two FTSE 100 dividend and growth heroes should offer the long-term ballast you need to keep growing your money into a big juicy sum.
I’ll drink to this one
My first tip is global spirits giant Diageo (LSE: DGE), which has long been a favourite of mine and has thoroughly justified my faith in it.
The share price has almost doubled in the past five years, during which time it has moved unerringly upwards, with 22% growth in the past year alone. It now boasts a market cap of £80bn, plus a bar full of household name brands, including Smirnoff, Johnnie Walker, Baileys Irish Cream, Tanqueray and Guinness.
CEO Ivan Menezes has also kept up with shifting attitudes towards alcohol in these more puritan times, which has seen people “drinking better not more” in his words, by focusing on international premium spirits. His strategy has served Diageo well.
Progressive income
Kevin Godbold recently praised the group for improving its figures a bit each year and progressing shareholder returns, and it recently posted 9% growth in full-year revenues, with free cash flow up a healthy 3.4%.
Many investors may overlook Diageo as a dividend stock, because it traditionally has a much lower yield than the FTSE 100 as a whole. This is the case today, as its 2% income is less than half the 4.5% you get on the index. Don’t be deterred, that’s partly because the share price has been rising so steadily so the dividend struggles to keep up. Management has been generous with shareholders, recently upping the full-year dividend by 5% while extending its share buy-back programme to £4.5bn.
The other thing you may notice is that Diageo stock is expensive, trading at a whopping 26 times earnings, against just over 17 times for the index. Again, this is par for the course. The truth is that Diageo is in demand, and you have to pay a premium price for a premium spirits maker. If that puts you off, maybe wait for the next market dip.
High income hero
Some people like a cigarette with a drink, but that’s not the only reason I’m including British American Tobacco (LSE: BATS) in my portfolio fit for a millionaire. This £70bn behemoth currently offers a massive forecast yield of 7%, covered 1.5 times by earnings. That is way above the index average, and offers a nice counterbalance to Diageo.
There is another way it differs – the current valuation is low, trading at just 9.4 times forecast earnings, deep into bargain territory. The existential threat facing tobacco stocks is that smoking kills and people in the developed world are renouncing the habit as a result. However, as Edward Sheldon points out, British American Tobacco has come up with a number of defensive manoeuvres, including heated tobacco and vaping pens, and there’s a potential move into marijuana.
In another contrast, the BATS share price has disappointed, falling almost 30% in the last year to trade at 2011 levels. However, there is a lot of bad news priced into this stock, and sentiment could quickly shift from here. While you wait for the share price to recover, that income will keep rolling in.
