Forget gold! When the world falls apart, I’d pick this FTSE 100 stock

I prefer income-generating FTSE 100 giant Diageo over gold for my passive income portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

From Sydney to New York, it seems dark clouds are gathering over the global economy. Economic growth has already stalled in Britain, based on the latest official gross domestic product numbers, and with Brexit looming on the horizon, things could get a lot worse. 

In times like these, savvy investors retreat to so-called ‘safe havens’. Traditionally, safe havens included government bonds from developed countries and premium real estate in megacities, all of which now seem overvalued to me. Some investors prefer gold. I, however, prefer an income-generating asset that has stood the test of time and prospered despite downturns — Diageo (LSE:DGE).  

The alcoholic beverage giant is arguably one of the most stable and robust stocks on the FTSE 100 index. Its track record of wealth creation dates back to the early 1990s and investors who bought the stock in, say, 1997 have seen their capital multiply seven-fold to-date. 

The stock has also been able to withstand the pressures of economic downturns. During the global financial crisis of 2008-09, when the broader index was down 40% from its peak, Diageo only lost 30% of its value. Over the past five years, which include the Brexit vote and its aftermath, the FTSE 100 has only gained 8.1%, while Diageo is up 96.6%.   

If you include share buybacks and dividends, the total shareholder return over that period would be even more impressive. 

Better than gold?

It’s difficult to deny gold’s merits as a safe-haven asset. The spot price of the commodity has quintupled since the year 2000. That implies a compound annual growth rate of 8.9%, while Britain’s average inflation rate has been 3.1% over that period. 

However, even if gold can replicate this performance in the future, Diageo’s 2% dividend yield, £4.5bn share buyback programme, and 30.5% return on equity outshine the yellow metal. Coupled with its historic resilience to economic upheavals, I believe Diageo is safer than gold.     

Looking ahead

Moving forward, I’m optimistic about Diageo’s prospects because of the strength of the company’s underlying brands, the shape of its balance sheet, and the diversification of its income sources. 

As I mentioned in a previous article, Diageo has significant exposure to both North America and emerging markets. This means the ongoing Brexit turmoil will be offset by a stronger US dollar, while slowing growth in developed markets will be offset by growing consumption in India and China. 

Foolish takeaway

Diageo’s scale and product mix make it somewhat impervious to economic cycles. As mentioned, the stock retained much of its value during the great financial crisis a decade ago. Since then, shareholders have more than doubled their investment if dividends and share buybacks are accounted for. 

Looking ahead, its track record of wealth creation, the global scale of the company’s distribution network and the promised £4.5bn share buyback programme make this stock more appealing to me than gold. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

VisheshR has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.

More on Investing Articles

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The Legal & General share price has gone nowhere. Why?

The Legal & General share price has performed much worse than the the FTSE 100 over the past five years.…

Read more »

Investing Articles

Where will the BT share price go in the next 12 months? Here’s what the experts say

The BT share price has been sliding for years. But after the latest set of results, it looks like the…

Read more »

Investing Articles

Are National Grid shares now a brilliant bargain?

National Grid shares look exceptionally cheap following last week's selloff. Is now the time to buy the FTSE 100 firm…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Up more than 15%! — this small-cap company is delivering phenomenal dividend growth

There’s more good news in this company’s interim report and it may be shaping up as a decent dividend growth…

Read more »

Electric cars charging at a charging station
Investing Articles

Big news for Tesla stock investors!

Tesla has just quietly dropped a key target it set for itself just a few years ago. What does this…

Read more »