£10k strikes me as an amount of money that could make a big difference to many people’s future finances, but only if you invest it wisely.
And one of the main places I’d avoid putting the money is into a Cash ISA because interest rates are so low, even with those that tie your money up for a few years. In many cases, compounding the returns from these low interest rates will leave your capital struggling to keep up with the eroding effects of general price inflation.
Your money needs to be working hard for you and its spending power needs to be growing over time. And I reckon one of the best ways to achieve that outcome is to compound the returns from shares by constantly reinvesting the dividends. But it’s important to choose shares backed by good-quality underlying businesses, like these two.
Products for smokers
Although firms making tobacco and new-generation smoking products have been out of favour with investors for the past couple of years or so, the shares of British American Tobacco (LSE: BATS) have been staging a bit of a comeback. At 3,080p, as I write, the stock is about 16% higher than it was around a month ago.
However, I reckon there could be more to come for shareholders because the firm sports a decent showing on quality, value and momentum indicators. On top of that, the forward-looking dividend yield for 2020 is running just above 7%, which I find to be tempting.
Last Wednesday, in the second-half pre-close trading update, chief executive Jack Bowles said the firm expects to deliver a strong performance for the full year in 2019. The company has been seeing gains in its share of the combustibles market and a “strong” price mix in the US and globally. There’s also been growth in the firm’s new products category because of product launches, “despite the recent slowdown in the US vapour market.”
I reckon regulatory fears about the smoking industry are subsiding within the investment community and see BATS as tempting.
Fast-moving consumer goods
In October, Reckitt Benckiser (LSE: RB) revealed to us in its third-quarter update that overall like-for-like revenue grew 1.6%. Behind that figure, like-for-like sales in the Hygiene Home division lifted 4.5% and in the Health division, they declined by 0.3%.
Chief executive Laxman Narasimhan described the outcome as “disappointing”. The health business delivered a weak performance “despite good market growth and stable consumer offtake”. In the US, the division saw more cautious retailer seasonal purchasing patterns. And in China, the infant nutrition offering faces ongoing challenging market conditions.
But Narasimhan reckons the issues facing the company are “clear and addressable”, which I read as meaning they are potentially short term. I’m tempted to buy some of the shares for their recovery potential and for a long-term hold. To me, Reckitt Benckiser remains a good business operating in a lucrative sector. With the stock at 6,047p as I write, the forward-looking earnings multiple for 2020 is just over 18 for 2020 and the anticipated dividend yield is a little under 3%.
