When looking for FTSE 100 stocks to add to my portfolio, I like shares that not only pay a dividend but also have growth potential. I’m looking for companies with strong brands that give them a competitive edge.
Two FTSE 100 stocks that I’m thinking of adding to my portfolio are Next (LSE: NXT) and Diageo (LSE: DGE). Here, I’m going to explain my investment reasoning behind these two shares.
#1 – Next
While most people would run a mile from retailers in the current climate, I think Next shares have the potential to grow over the long term.
It’s worth pointing out that while this FTSE 100 stock has retail stores, around 50% of its revenue even in normal times comes from online sales. This means that Next has been able to make up for lost stores revenue by selling more online in the pandemic.
E-commerce is a key part of its growth strategy and I expect this to grow over the long term. This is one of the reasons why I like the idea of adding stock to my portfolio.
Next also has diverse range of products, strong brands that set the company part from its competitors and overseas sales that are growing. I expect the retailer to capitalise on this international opportunity — another growth driver for the FTSE 100 stock.
It’s only fair that I mention that there are risks with this stock. First, the shares aren’t cheap. Next is trading on a P/E ratio of 17x and the share price is close to all-time highs. While Next paid a dividend in 2020, there is, of course, no guarantee this will continue.
The Christmas update was positive and it even forecast a reduction in its financial year-end net debt. As a long-term investor I like seeing companies that want to reduce leverage and strengthen their balance sheets. I reckon it’s worth paying for a quality company like Next and hence it could make a nice addition to my portfolio.
#2 – Diageo
I like Diageo as it has a strong portfolio of beverage brands. Like Next, I reckon this gives the FTSE 100 stock a competitive edge. Even Nick Train, one of the UK’s highest-profile fund managers, likes Diageo. He’s invested in the stock via his Finsbury Growth & Income Trust portfolio.
Drinkers are loyal to premium brands such as those that are part of Diageo’s offering. It’s capitalising on the ‘premiumisation’ trend, where it believes consumers will pay for a higher-quality product.
While there’s a risk that this trend could run out steam, so far the strategy has worked. Its growth potential makes it a possible good addition to my portfolio.
I should highlight that Diageo shares aren’t cheap on a P/E of 27x. The Covid-19 pandemic has also had an impact on Diageo’s business. Lockdowns have resulted in fewer people socialising and drinking alcoholic beverages. There’s a concern that the longer the restrictions persist, the more severe the negative impact will be on Diageo’s business.
Diageo has also been growing by acquiring brands and I reckon it will stick with this strategy. And while there’s no guarantee it will continue, it even managed to grow its dividend during the pandemic. For these reasons, I think Diageo could be a good addition to a diversified portfolio like mine.