This week’s meltdown has put yet another nail in the coffin of buy-to-let, which now looks like a costly way of generating passive income in retirement. I have favoured shares for some time, and this only confirms my view.

Buy-to-let was once a glorious investment, as property prices and rental income rolled ever higher. It has slowly been destroyed by higher taxes, reduced allowances, tougher regulations, and now rising interest rates.

I’m buying stocks for passive income

Stock markets have also taken a beating this year, but they still look like a far better way of building a steady stream of passive income to me.

A portfolio of shares seems much easier to manage than a buy-to-let property. I can buy and sell shares in seconds, take all my returns free of tax inside a Stocks and Shares ISA, then basically ignore them, if I choose. By contrast, buying property takes months, has high upfront and ongoing costs, and involves a lot of bother in finding tenants, completing tax returns, and paying tax to HMRC.

I wouldn’t buy a property right now even if I could get a mortgage, but I am happy to go hunting for bargain UK shares. The FTSE 100 has fallen this year, by 8.73%. That means I can buy top companies on the index at low prices.

Barclays now trades at just four times earnings and yields 3.97%. Tobacco maker Imperial Brands Group trades at 7.6 times earnings and yields 7.37%. Mining giant Rio Tinto is valued at just four times earnings, and its yield is a staggering 15.08%.

The FTSE 100 can even give me exposure to the property market through a housebuilder such as Barratt Developments. It trades at 4.5 times earnings and would give me a passive income of 9.95% a year. 

Tax-free returns inside a Stocks and Shares ISA

Of course, buy-to-let could bounce back. If house prices fall sharply, there could be some real bargains around. Mortgage rates may only see a temporary spike. Good property is still in short supply, and that drives tenant demand.

Shares can be risky. Global markets are in meltdown right now. Dividends can be cut, at any time. Profits could fall, and share prices follow. 

Barratt, as a house builder, is exposed to a house price crash. Its share price is down 11.51% in the last week alone. Over five years, it has fallen 38.93%. If the Bank of England hikes interest rates to 6% as many predict, demand for new builds will fall because buyers will no longer be able to afford them.

Yet I think UK shares are a much better way to build the passive income I’m after. My strategy would be to buy them at today’s dirt-cheap prices, and hold them for years and years.

I will build a balanced blend of a dozen FTSE 100 stocks or so, to spread my risk. When I retire, the passive income they pay will underpin my pensions. It all seems a lot more straightforward than buy-to-let.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The post Buy-to-let is in trouble so I’ll generate passive income from shares instead appeared first on The Twelfth Magpie.

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Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The UK’s FTSE 100 is renowned for its portfolio of blue-chip stocks. The index has an average dividend yield of almost 4%, with some dividend stocks boasting yields of 8%-10% on the upper end. With the index in the red this year, there’s room for me to buy the FTSE 100’s top income stocks for a bargain.

High yields are a commodity

Rio Tinto (LSE: RIO) has the FTSE 100’s highest dividend yield of 11%, paying investors approximately £3.07 per share. It’s also worth noting that the mining firm had a stellar 2021, allowing it to pay a special dividend of around £0.46 per share. This brings Rio’s total dividend to £3.53 per share, with its share price also up 8% this year!

While high dividends are attractive, it’s not always sustainable. This tends to be the case with mining companies as they operate in economic cycles. Given that the global economy is expected to slow down this year, Rio’s top line is expecting some bruising. Additionally, China, its biggest customer, still has city-wide lockdowns in place to eradicate Covid. This has halted many construction projects and demand for iron ore. Therefore, I am doubtful that the blue-chip stock can continue generating a high level of passive income for investors.

Bricks and mortar

Persimmon (LSE: PSN) is not historically known for paying a high dividend. Its current dividend yield of 11% is only so high due to its share price plunging 25% this year. That’s because as share prices decrease, yields go up as a result. Nonetheless, the company is expected to pay a dividend of £1.10 per share, down £0.15 from its previous payment.

The reason for this is the firm’s decreasing margins. Its initial dividend of 11% was not well covered by earnings nor forecasts to begin with. Not to mention, higher interest rates are expected to slow the demand for houses. This would have an impact on Persimmon’s sales revenue. Combine that with rising material costs and the FTSE 100 housing giant doesn’t have as much cash to hand out to investors. However, its ex-dividend date is in a month’s time, and could present an opportunity for me to make some passive income on a bargain.

An Imperial dividend

The Imperial Brands (LSE: IMB) share price is up 3% this year due to its defensive nature. Pair that with a dividend yield of 8%, and this stock has been a great asset for investors this year.

The tobacco firm released a positive trading update last month. Smokers do not seem to be quitting in a hurry, and its next generation products showed positive results. This indicates that there may be a future for the company when or if cigarettes die out. Management also mentioned that the firm is in line to meet expectations when it reports its half-year results.

We (expect) full-year net revenue growth of around 0-1% on a constant currency basis and adjusted operating profit growth of around 1%.

Source: Imperial Brands Pre-Close 2022 Trading Update

For that reason, Imperial Brands is likely to continue handing out a healthy dividend as one of the index’s best income stocks.

The post Are the FTSE 100’s top income stocks a bargain? appeared first on The Twelfth Magpie.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

With a spare £500, I’d buy shares in both companies today — here’s why. 

Imperial stock: 8.68% dividend yield

Imperial Brands has the third-highest dividend yield in the FTSE 100 index, behind Rio Tinto and Persimmon. The Imperial share price has increased by 9% over the past year. The stock currently trades at a reasonable price-to-earnings ratio of 5.39. 

Tobacco stocks typically carry high dividend yields due to low capital expenditure and high profit margins. Rather than reinvesting their impressive cash flows into the business, they often distribute regular dividends to shareholders. 

There are potential moral concerns surrounding investing in Imperial stock, given the adverse health implications for consumers of its products. Moreover, creating a smoke-free generation has been a longstanding goal of the Department of Health.

The UK may one day follow in New Zealand’s footsteps. The Pacific country recently announced a ban on anyone born after 2008 from purchasing cigarettes. As UK sales make up 9% of the group’s net revenue, this could seriously threaten the Imperial Brands share price, despite efforts to diversify away from combustible tobacco with a focus on vapour and oral nicotine products. 

This wouldn’t dissuade me from buying Imperial stock, however. I see the fact that it has one of the highest dividend yields in the FTSE 100 as reasonable compensation for the long-term risks.

The company also posted encouraging financial results for 2021. Operating profit increased by 15.2% and basic earnings per share were up by 89.5% on 2020. Crucially, Imperial’s dividend increased by 1% to 139.08p per share in line with the company’s progressive dividend policy. 

Direct Line stock: 8.2% dividend yield

Direct Line is one of the top ten FTSE 250 stocks when it comes to dividend yields. The Direct Line share price is down 10% over the past year. I see this as an attractive entry point to take a position in the insurer. 

At £314.8m, motor insurance produced 54% of Direct Line’s operating profit for 2021. I believe consumer demand for its insurance products will remain strong, despite rising inflation and squeezed household budgets.

After all, driving is an essential feature of many people’s lives and car insurance is mandated by legislation. Additionally, Direct Line is a familiar household brand thanks to the company’s advertising campaigns. 

The introduction of new FCA pricing rules in January has caused uncertainty in the insurance market, leading to hikes in premiums. Direct Line acknowledges this risk in its financial results and the company has conducted scenario testing to mitigate this. 

Considering its downtrodden share price and a dividend yield over 8%, I’d buy shares in Direct Line now.  

Dividend yields for passive income

If I invested £500 evenly between the two stocks, I’d expect to receive £42.20 a year in passive income at current dividend yields.

There is speculation that Chancellor Rishi Sunak may cut the current £2,000 dividend allowance in the Spring Statement. To protect my total dividend income from future tax changes, I’d buy these equities in a Stocks and Shares ISA before the upcoming ISA deadline on 5 April. 

The post 8.2%+ dividend yields! I’d buy these 2 passive income stocks with £500 appeared first on The Twelfth Magpie.

More reading

• How much do you need in an ISA to target a £9,999 second income that rises every year?
• 6.7% yield! Is Imperial Brands an irresistible FTSE 100 share to consider?
• Here are the stunning returns I’m targeting from £20,000 in this high-income FTSE star
• State Pension of £12,548 not enough? How much would be needed in an ISA to match it?
• How to invest £20k in FTSE 100 stocks and target a 6% dividend yield

Charlie Carman does not own shares in any of the companies mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, ie Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But the firm has said that this year’s boost in profits “strengthens the foundations” of the firm’s five-year plan, which will include further internal reorganization next year.

Does this mean 2022 could be the year Imperial Brands makes a comeback?

Plans for 2022

Imperial has announced a slew of new plans through which it hopes to reinvigorate the company and ‘create long-term value’.

The first of these plans is to refocus on its five most profitable markets: the UK, the US, Australia, Spain, and Germany, which are responsible for 76% of Imperial’s sales.

The second plan is to simplify its operations, which Imperial hopes will cut inefficiencies. 

Thirdly, it plans to invest in new market opportunities. According to Imperial’s note to investors on this strategy, it believes that while new market opportunities may be small, the profit margins are much larger. It is unclear if Imperial means new products or new international markets, but given the plan to reduce its international footprint, I’m inclined to think it’s the former.

Share price, revenue, and debt

Imperial Brand’s share price has performed very poorly in recent years. Currently trading at 1,573p it has lost nearly 70% of its value since 2016. But the company has remained profitable. Until recently it sold tobacco products in almost every country in the world and still has a market cap of £14.8bn. In 2020 it saw revenues upwards of £32bn and six months through the 2021 financial year, Imperial has earned £15.6bn.

Imperial also has very low levels of debt when compared to revenue. In 2020, debt accounted £11.4bn on the balance sheet, a number which has been reduced to just £11bn so far this year.

Operating profit still remains low at £1.6bn but has increased 77% from 2020. Imperial credits rising cigarette prices and the exit from the Russian and Japanese markets for this increase.

All of these numbers point in the right direction. In my opinion they reveal that the company is still in good financial shape and willing to make difficult choices to maintain that strength.

Tobacco business

Tobacco is an unusual business to say the least.

Cigarettes have been steadily declining in popularity in large parts of the world. Younger generations in the UK and US are far less likely to smoke than their parents. This is even accounting for e-tobacco products. In the UK particularly, heavy taxes are levied on these products to actively discourage their use.

But a tobacco customer is often one for life and few products inspire such consistent brand loyalty either. If taxes rise on other products, it’s not unreasonable to assume that a customer would switch to a cheaper brand. But I have it on good authority from my smoker friends that they like the brand they like and that’s largely the end of it. Even if taxes do go up.

Conclusion

Imperial Brands has some very solid fundamentals. It has low debt, high revenue, and a loyal customer base. I like that Imperial has a five-year plan and is pivoting towards aspects of the business that make money.

There’s no guarantee that it will work, but the commitment to a high dividend yield makes for a good consolation prize.

I plan to add Imperial to my portfolio.

The post Is Imperial Brands the best investment opportunity of 2022? appeared first on The Twelfth Magpie.

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• How much do you need in an ISA to target a £9,999 second income that rises every year?
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• State Pension of £12,548 not enough? How much would be needed in an ISA to match it?
• How to invest £20k in FTSE 100 stocks and target a 6% dividend yield

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As good as it sounds, a sky-high dividend yield can often be a red flag when it comes to accessing the best income stocks on the UK market. Does this apply to FTSE 100 tobacco giant Imperial Brands (LSE: IMB)? To help answer this question, it’s worth taking a quick look over today’s full-year numbers. 

Transformation on track

Based on this morning’s report, CEO Stefan Bomhard’s plan to increase investment in its top-five priority markets (which bring in the majority of profit) looks to be bearing fruit. Market share gains were seen in the US, UK and Spain, although Germany and Australia still declined. On top of this, losses at its next-generation product (NGP) division fell by 57% as a result of the company’s decision to exit specific markets.

All told, revenue at the top tier stock rose 0.7% to £32.8bn in the 12 months to the end of September. Operating profit climbed by 15.2% (or £415m) to £3.15bn, albeit supported by the sale of Imperial’s premium cigar business for £281m.

To a point. Looking ahead, IMB stated that it remains on track with the five-year plan outlined at the beginning of the year. 2022 will be a year “of further reorganisation and change“, with adjusted operating profit forecast to rise at a “slightly slower” rate than net revenue due to further investment.

Of course, nothing is ever certain. The ongoing Covid-19 pandemic could still have an influence on sales (and the speed of IMB’s transformation). The company could also face cost pressures going forward. 

Notwithstanding these potential headwinds, it would seem that investors weren’t hugely dissatisfied with today’s report. As I type, the IMB share price is down only slightly. 

Let’s return to those dividends.

Huge dividend yield!

Today, IMB announced a 1% rise to the total dividend. A 139p per share payout gives a trailing yield of 8.7%. For FY22, analysts are expecting this to increase to 143p, which would mean a stonking 9% yield.

For perspective, the FTSE 100 returns ‘just’ 3.4%. Given the inflationary times that we live in, IMB’s cash returns have got to be worth the risk, right?

Well, I’m torn. On the one hand, the tobacco industry looks to be in a state of (very) long-term decline. Backing this up, IMB stock has more than halved in value in the last five years. While the dividends have helped cushion this blow, it’s hardly what investors want to see, especially as other FTSE 100 ‘sin stocks’ have fared better. 

Then again, one could say that an awful lot of negativity is priced in. Right now, Imperial stock trades on a little over six times forecast earnings. With expectations this low, one might speculate that only a small profit beat could bring forth a recovery.

Going back to my earlier question, those dividends should also be safely covered by earnings. This makes a cut unlikely in the near future.

Cheap FTSE 100 stock

As things stand, I wouldn’t be averse to buying IMB for a purely dividend-focused portfolio. That income stream really does look great. 

Having said this, I would ensure I was diversified elsewhere in the FTSE 100 beforehand. Since a share price recovery still looks some way off (if it comes at all), I’d also need to be comfortable holding for years rather than months.

The post 9% dividend yield! Should I buy this cheap FTSE 100 stock today? appeared first on The Twelfth Magpie.

More reading

• How much do you need in an ISA to target a £9,999 second income that rises every year?
• 6.7% yield! Is Imperial Brands an irresistible FTSE 100 share to consider?
• Here are the stunning returns I’m targeting from £20,000 in this high-income FTSE star
• State Pension of £12,548 not enough? How much would be needed in an ISA to match it?
• How to invest £20k in FTSE 100 stocks and target a 6% dividend yield

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Dividend delight

Today’s brief statement from the company appears to have gone down well with the market. 

Unsurprisingly, trading has remained “broadly in line” with the comments made by the firm earlier in March. All told, adjusted operating profit for the just-completed FY21 financial year will likely come in at roughly £700m. Approximately half of this will come from the firm’s international parcels business (GLS).

The main reason why the Royal Mail share price is buoyant this morning is probably due to the promise of a one-off final dividend from the company. A 10p per share cash return will be paid out to those who still hold the stock at the end of July. As expected, RMG plans to unveil a new dividend policy when it releases its latest set of full-year numbers in May. 

Still not tempted

As great as the last year has been for holders, we need to put these things in perspective. The Royal Mail share price has only just got back to levels it last hit three years ago!

This performance is not indicative of a great business. Indeed, RMG continues to score poorly on ‘quality’ metrics. Returns on capital employed (ROCE) are woeful. As one would imagine from a business in this space, operating margins are also wafer-thin. 

On top of this, Royal Mail still faces stiff competition. Rival Hermes, for example, picked up 10 million parcels from homes in December. Royal Mail managed only one million in the six months its equivalent service has been operational. The former’s offer of free parcel pick-ups from home until the end of May may provide a temporary boost but I question whether volumes might moderate once lockdown restrictions lift. 

RMG shares look cheap on 11 times forecast FY22 earnings but I remain convinced that there are far better businesses to invest in.

Value trap?

Another stock updating the market today — Imperial Brands (LSE:IMB) — hasn’t fared quite so well. In contrast to the Royal Mail share price, the FTSE 100 giant can’t seem to catch a break. Although slightly higher than where it was one year ago, the company’s valuation is still down 60% over the last five years.

It doesn’t look like today’s pre-close trading update will be enough to reverse this trajectory. That’s despite the £14bn cap saying that it had made a “good start” to its current financial year.

At the six-month stage, trading at Imperial has been in line with expectations. As such, the top-tier tobacco titan still predicts it will deliver low-mid-single-digit growth in organic adjusted operating profit for the full year. 

Right now, IMB’s stock can be picked up for just six times forecast earnings. That looks incredibly cheap at face value. What’s more, the shares currently boast a dividend yield of over 9%.  

Notwithstanding this, the company continues to give off the whiff of a value trap. Until I see clear evidence of a more promising outlook, I’ll remain on the sidelines.   

The post The Royal Mail share price continues to rise. Here’s why I’m steering clear appeared first on The Twelfth Magpie.

More reading

• How much do you need in an ISA to target a £9,999 second income that rises every year?
• 6.7% yield! Is Imperial Brands an irresistible FTSE 100 share to consider?
• Here are the stunning returns I’m targeting from £20,000 in this high-income FTSE star
• State Pension of £12,548 not enough? How much would be needed in an ISA to match it?
• How to invest £20k in FTSE 100 stocks and target a 6% dividend yield

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The current ultra-low interest rate environment means the gains you make from holding dividend stocks are greater than ever before. But, many FTSE 100 companies are suspending or cancelling dividends because of coronavirus-induced reductions in revenues.

With this in mind, I’ve found two top FTSE 100 companies still paying great dividend income.

BP dividend

The current BP (LSE: BP) share price of 341p provides for a dividend yield of 10.5%. The oil major has so far shown no sign of cutting its dividend, unlike rival Shell. But, even if it does, the market has been speculating on a cut long enough for it to be already accounted for in the share price.

In addition, oil prices appear to be stabilising. Brent crude is now above $40 a barrel for the first time in nearly three months on the belief the world is beginning to emerge from lockdown. Oil stockpiles are falling and OPEC+ are close to agreeing a short extension on supply cuts. This is good news for BP’s 20% stake in Russian state oil producer Rosneft.

The BP share price, trading at a current price-to-earnings (P/E) ratio of 19.7, is slightly above the industry average of around 16. However, the company boasts a solid credit rating and the financial flexibility to help with these tough times. In addition, BP is aiming for a breakeven point of $35 per barrel during 2021, helping with profitability. The market clearly expects more from the oil major than from other oil firms.

A FTSE 100 stalwart

FTSE 100 stalwart Imperial Brands (LSE: IMP) has also kept its dividend. However, Imperial has rebased its policy, so payouts may vary depending on profitability. Usually, this means a dividend cut but in Imperial’s case, its earnings are reliable meaning its profits should be too.

In any case, boasting a dividend yield of 13%, even after a hypothetical 50% cut, Imperial remains a top FTSE 100 dividend payer. And if that’s not enough, the tobacco firm maintains plans to return excess cash to shareholders via share buybacks.

Moreover, Imperial is a cash-conversion machine. In 2019, it converted 95% of its operating profits into cash. Its business has stayed strong throughout the coronavirus pandemic which encourages high-profit expectations for the rest of the year. 

Both these FTSE 100 firms boast strong fundamentals and good dividend growth history, Imperial in particular. Financial markets appear bullish about the prospects of both. Indeed, Imperial currently trades on a P/E of 16.5, about average for the industry.

Despite this, both companies offer good rates of return, especially when compared with the rest of the index. Reinvesting these dividends and compounding the return is definitely the best way to build a second income.

I think Imperial and BP offer two of the best opportunities for passive income on the FTSE 100 right now. I’d buy and hold both today.

The post Building a second income? Here are 2 FTSE 100 dividend stocks I’d buy and hold today appeared first on The Twelfth Magpie.

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• Just how bad could it get for the BP share price?
• How much do you need in an ISA to target a £9,999 second income that rises every year?
• BP shares are falling. But is the oil market actually tighter than investors think?
• 6.7% yield! Is Imperial Brands an irresistible FTSE 100 share to consider?

Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The deadline for savers to make the most of their tax-free ISA is midnight on 5 April 2020. Any allowance not used by then will be lost. With interest rates now near zero, I think it makes sense to use your ISA allowance if you can by adding to it.

The ultimate FTSE 100 defensive stock 

The crashed FTSE 100 share opportunity I’m adding to my ISA is Imperial Brands (LSE: IMB). Fast-moving consumer goods companies have been relative safe havens through the Covid-19 pandemic. Not surprisingly, Imperial’s sales have held up. This is mainly due to the continuing demand for its main product, tobacco. Understandably, this is a company that will not be every investor’s cup of tea.

However, look past this controversial product and you’ll see a very successful FTSE 100 business. Although global tobacco sales have been dropping over time, Imperial’s customer base has been willing to pay higher prices for its products. This allows the company to protect its profit margins and grow its dividends. Provided Imperial can continue offsetting dropping sales with price increases, margins will likely continue. In the short to medium term, I think this is plausible. But it is a factor to watch for in the long-term.

Like many FTSE 100 businesses, Imperial’s supply chain has experienced some recent disruption. The company has managed this well by stockpiling its products where required. It is also diversifying into next generation products (read: vaping). In addition, the appointment of a new CEO has reduced some uncertainty about the firm’s future.  

A top FTSE 100 dividend-paying stock 

One of the main highlights of holding shares in Imperial is its high dividend yield. The yield has averaged about 12.6% over the last 12 months. Going forward, the yield is perhaps too high at about 17.5%. However, some of this is likely due to current unstable market conditions.

This means investors are able to reinvest at good rates. I think compounding investments right now is one of the best ways to improve your future income. 

A cash-generative business

Another big attraction for me is Imperial’s ability to convert 95% of its operating profits into cash. Cash may be used for investments or for rewarding shareholders. Imperial has indicated the latter by committing to a ‘progressive’ dividend. It is also still planning to return cash to shareholders in the future via buybacks. 

Imperial is currently trading around 1,557p, having crashed with the rest of the FTSE 100. This is down from 1,900p at the beginning of 2020. It’s also hugely below some analyst valuation estimates of £35.00.

These analysts have used Imperial’s “wide economic moat” in their analysis. In other words, competitor firms are going to have a hard time chasing market share. Imperial is dominant in its sector.  

At about 3 times net debt to profit, Imperial holds more debt than I think is ideal. However, its earnings are reliable, meaning this is sustainable.

Overall, Imperial is a solid business that rewards its shareholders well. It’s definitely one for my ISA right now.   

The post The crashing FTSE 100 stalwart I’m adding to my ISA before 5 April appeared first on The Twelfth Magpie.

More reading

• How much do you need in an ISA to target a £9,999 second income that rises every year?
• 6.7% yield! Is Imperial Brands an irresistible FTSE 100 share to consider?
• Here are the stunning returns I’m targeting from £20,000 in this high-income FTSE star
• State Pension of £12,548 not enough? How much would be needed in an ISA to match it?
• How to invest £20k in FTSE 100 stocks and target a 6% dividend yield

Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This episode has cut fast and deep with investors too, a whole generation of whom have never witnessed markets bleed to this extent before.

That’s not to say that all stocks will perform poorly during the most difficult times. Here are some that might do better than most.

Bargain hunters and sinners

Of all the sectors most impacted by the outbreak, retailers feature near the top. With all but essential shops shut and some online operations being stood down (e.g., Next), it’s going to be a hard few months for companies of all sizes. Even when the lockdown lifts, shoppers will surely be more careful with their cash than ever before. 

One group that tends to do well during recessionary times, however, are discount stores. FTSE 250 firm B&M European Value Retail would be a good example. I also suspect that Primark-owner and top-tier member Associated British Foods will remain popular.

The outlook for other sectors is unclear. The postponement of huge sporting events such as Euro 2020 and the Olympics, for example, will have a huge impact on betting firms in the near term but it may also dissuade some who like the occasional flutter from doing so during the nailed-on recession. For this reason, I suspect gambling firms might still be a risky bet going forward.

Other sin stocks, such as tobacco firm Imperial Brands, could fare better. Aside from their addictive nature, smokers may regard their products as affordable ‘treats’ during stressful times. Despite pubs and clubs being closed, firms such as Diageo may be another beneficiary as more of us drink at home.

Steady stocks

Of course, there are less controversial stocks that should offer stability regardless of what the economy is doing. Within this category, you might include phamaceuticals, waste management firms, and funeral services. As such, businesses like GlaxoSmithKline, Biffa, and Dignity should all prove resilient.

Having already benefited from panic-buying as the coronavirus outbreak worsened, supermarkets should be something of a safe haven too. My preference in this space would be Tesco, for its dominant market share.

Given the UK’s devotion to our furry friends, those in the pet space could also be worth a look. Earlier this week, FTSE 250 firm Pets at Home stated that it would keep its stores, website, and veterinary practices open for owners to pick up “essential“ products and obtain emergency health care, underlining how demand for these things won’t suddenly disappear. Veterinary services provider CVS Group is another option.

A word of caution

While most or all of the above should do better than most in troubled times, it’s worth mentioning that this will not necessarily translate into big share price gains. In reality, it may simply be that their value falls less than others.

For this reason, it’s worth remembering that all but the most cautious of us should still consider quality growth stocks if we plan on staying in the market for many years to come.

The post Fear a recession? Here are the stocks I think might thrive appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK owns shares of B&M European Value. The Motley Fool UK has recommended Associated British Foods, Diageo, Imperial Brands, and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Notwithstanding the potential for any macro issues to upset the markets, today’s trading update leads me to think recent momentum should continue over 2020.

“Good progress”

Group revenue rose 6.8% to €11.8bn over the three months to the end of 2019 thanks to a stellar performance in what remains a “challenging” European market (up 10.1% to a little under €9bn). That said, revenue from elsewhere declined 2.7% to €2.5bn.

Based on this performance, Vodafone chose to reiterate its guidance of adjusted earnings of €14.8bn-€15bn, and free cash flow of around €5.4bn for the full year.

Away from the numbers, the company also reported making “good progress” on its strategic priorities over the period, including the appointment of a senior management team for its soon-to-be-listed towers business (European TowerCo). CEO Nick Read hinted that shares of this spin-off should hit the market in “early 2021.“

Solid ‘hold’

Vodafone’s shares were up slightly this morning, suggesting investors were satisfied with what the company had managed to achieve. Then again, most aren’t invested for capital gains — it’s the dividends they’re after.

Assuming it returns the 7.9p per share currently penciled in by analysts, Vodafone yields 5.2% at its current price — far more than the 1.3% you’d receive from even the highest-paying Cash ISA.

Taking this, today’s update, and the fact that the £40bn-cap is finally trying to tackle its serious debt burden by selling assets into account, I think the stock now looks a solid ‘hold’ for those looking to generate a second income stream from their portfolio. 

Holy smokes!

The fairly muted reaction to Vodafone’s trading update was in complete contrast to that afforded to tobacco giant (and fellow top-tier member) Imperial Brands (LSE: IMB). Its shares were down 8% this morning following news that the US Food and Drug Administration’s decision to ban certain vaping-related products would likely lead full-year revenue “to be at a similar level” to that achieved in 2019.

In addition to impacting sales growth, Imperial said the ban would force a write-down of the company’s flavoured inventory, resulting in a £45m hit on adjusted operating profit over the first half of its financial year.  Adjusted earnings per share are predicted to come in “slightly lower than last year.” 

Value trap?

The belief that vaping would offset declining tobacco sales was one reason why I was previously bullish on Imperial. Unfortunately, recent developments have forced me to re-evaluate the investment case.

Given the real possibility of further regulations being imposed in light of research showing these alternative products might be just as harmful as traditional smoking, I wouldn’t be surprised if the shares continued to fall.

Before this morning, Imperial’s stock was already trading on just 7 times forecast earnings and offering a seriously-high 11% dividend yield. Considering the headwinds it faces, I’d be staggered if cash payouts weren’t significantly reduced in the near future, even though the extent to which they are covered by profits is still slightly higher than over at Vodafone.

In my opinion, there are far less risky opportunities to generate income from stocks. 

The post Forget the Cash ISA. I’d hold FTSE 100 dividend stock Vodafone instead appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.