When we invest for long-term income, it’s easy to focus just on the dividend stocks of the FTSE 100. But I reckon the FTSE 250, with a bigger balance of growth stocks, might even do better.
The thing is, we don’t need dividends to draw income from our investments. We can always sell some shares each year and take the cash that way.
Some folk might gasp in horror at the idea. I mean, we should be trying to hold for ever, and even reinvest dividend cash when we can, surely?
How long can we last if we chip away at our actual capital?
It’s all cash
Well, in the past few decades, plenty of people have retired with their portfolios stuffed full of Nasdaq growth stocks. And hardly any of them pay a penny in dividends.
But their wealth has grown well ahead of the market average, and they can more easily afford to sell shares.
And, it’s always possible to invest for growth now, if that’s an investor’s preferred long-term strategy. And then switch to blue-chip dividend stocks on retirement to try to preserve capital.
This is all getting me to one thing. I see some great value stocks in the FTSE 250 right now, at a time when the smaller index is in one of its down spells.
Long-term play
Games Workshop (LSE: GAW) is one. The shares are on a forecast price-to-earnings (P/E) ratio of 22, dropping to 19 by 2026. There’s clearly a growth premium built into that valuation.
But I like to view a P/E in the light of a firm’s net debt. And, oh, there isn’t any. Games Workshop is in a net cash position.
If we compare that with, say, FTSE 100 growth champion Rolls-Royce Holdings, that’s on a higher P/E and carries a couple of billion net debt.
There’s still growth risk at Games Workshop. And I’m wary of a firm that depends on whatever people are doing for leisure. But that valuation looks fair to me.
Oh, and there’s a forecast 4.4% dividend yield. So it’s maybe not so far out of my usual strategy after all!
Global growth
When I think of global growth stocks, my mind turns to investment trusts. I think they can be a great way to spread the risk across a basket of stocks.
Scottish Mortgage Investment Trust might be the best known, with its choice of Nasdaq stocks. But I’m thinking of the smaller Alliance Trust here.
It holds Microsoft stock. And there’s some Amazon.com and NVIDIA in there too.
There’s only a modest 2% dividend. And the share price could be volatile, along with the Nasdaq. Oh, and the Nasdaq might be a bit toppy again now.
But to help build a pot from which to eventually generate passive income, I think it could be a nice addition.
Just a start
These are just two I’m looking at in the smaller FTSE 250 index. And I really do think we could build some nice long-term income from it.
