The FTSE 100 is the index of leading large companies listed on the London stock market. These shares have the biggest market capitalisations, although that doesn’t necessarily make them better. However, I do like that many FTSE 100 shares have a long trading record, which can improve my confidence in their business competence.
If I had £5,000 to invest today, I’d consider putting it in the five FTSE 100 shares below. To reduce my risk by diversifying, I’d put £1,000 in each of the shares.
D S Smith
I see long-term growth potential in the paper and packaging industry. D S Smith could be a beneficiary of that.
Online shopping has been a boon for packaging suppliers. The company’s focus on European and North American markets enables it to capture premium pricing opportunities. It has a proven ability to grow earnings, last year reporting £455m at the operating profit level.
But one risk is the compliance costs of an increasing tide of environmental rules. That could reduce profits.
Tesco
Tesco is the leading British supermarket chain. It has slimmed down its operations, selling its Asian business to focus more on core markets in the UK and Eastern Europe. Given how competitive the UK retail landscape has become, I think that should be positive for these FTSE 100 shares.
With a 4.3% yield, I like Tesco for its income potential in my portfolio. But one risk is less profitable online sales eating into profit margins as they displace in-store shopping.
Asian exposure
Financial services group Prudential has been reshaping itself too in recent years – but in the opposite direction to Tesco. It spun out its M&G business in the UK. ‘The Man from the Pru’ is now mostly focused on customers in developing markets, particularly Asia.
The company has a strong presence there. It is using digital technology to cut customer acquisition costs in countries like Indonesia and Vietnam. I see strong growth potential for these FTSE 100 shares exposed to fast-growing markets. Yet a risk is the opaque regulatory environment of some of Prudential’s target markets. That could lead to a fall in profits should the company’s growth unnerve local competitors and regulators.
FTSE 100 shares for income
A high-yield choice within my £5,000 allocation would be British American Tobacco. The owner of brands such as Lucky Strikes is a global heavyweight. That business spread makes it less vulnerable to localised swings in consumption patterns. Its dividend yield of 7.4% is attractive and it has raised its payout each year this century.
BAT generates huge cash flows. That is why it can support the dividend. However, with around £40bn of debt on its balance sheet, a risk is that debt repayment could be prioritised over dividends in future. Competitor Imperial Brands slashed its dividend last year.
Diageo
Drinks manufacturer Diageo is another company on my list of FTSE 100 shares that has raised its dividend annually for decades.
I also like the company’s growth potential. With a carefully curated portfolio of premium brands such as Johnnie Walker and Smirnoff, I think it is well-positioned to respond to shifting tastes in the drinks market. Its premium focus enables it to achieve high profit margins.
But alcohol consumption is falling among younger consumers, so this is a potential setback I need to keep an eye one.