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A lot of UK investors tend to favour high-yield dividend shares. However, I‘m not convinced this is necessarily the best investment strategy for someone in their 40s (like myself) who’s still working and, realistically, has decades until retirement.
I reckon those in their 40s are better off trying to find high-quality shares that can generate substantial wealth for investors over time through both strong gains and dividend income. With that in mind, here are two top stocks for 40-something investors to consider.
One of the UK’s best tech stocks
First up we have Sage (LSE: SGE). It’s a FTSE 100 technology company that specialises in accounting and payroll software for small and medium-sized businesses.
This company has been an amazing wealth generator in the past (despite having a low dividend yield). Over the last decade, its share price has risen nearly 200%. Add in dividends and investors have received total returns of more than 13% a year. There aren’t many stocks in the Footsie with that kind of performance track record.
Looking ahead, I see potential for more attractive returns. In my view, Sage is really well positioned to benefit as small businesses across the world move to get up to speed digitally. I reckon its profits are likely to rise substantially over the next decade on the back of the digital transformation theme. This profit growth should lead to both share price growth and higher dividends for investors (the yield is about 2% today).
In terms of the valuation, the price-to-earnings ratio (P/E) here is currently about 25. That’s quite high by UK standards. But for a software company with recurring revenues and a high level of profitability, it’s actually quite low.
So I’m comfortable with that multiple. That said, there’s some valuation risk. If growth was to slow due to a weak economy, or more competition from rivals, investors might decide that the company doesn’t deserve the current P/E ratio and send the share price down temporarily.
Well positioned for the digital revolution
Another stock that looks well placed to benefit from the digital revolution we’re in the midst of is Gamma Communications (LSE: GAMA). It provides digital communication solutions (phone, video, messaging, and collaboration tools) for businesses across the UK and Europe.
This company’s also generated brilliant returns for investors over the long term. Around a decade ago, it came to the market via an IPO at a price of 187p per share. Since then, its share price has risen about 800% (roughly 25% a year). Investors have received dividends on top (the yield’s only about 1% currently).
Despite this huge share price rise, the stock doesn’t look expensive today as the company’s earnings are growing rapidly. For 2025, analysts expect Gamma to generate earnings per share of 91.3p. That puts the stock on a forward-looking P/E ratio of just 18. At that multiple, I see a lot of value on offer.
I think the big risk here is the company’s recent move into Europe. This offers huge potential but there’s no guarantee the company will be able to crack the market.
I’m optimistic that Europe will lead to further growth for the company though. Overall, I’m excited about the potential here.
