Let’s say I had £3K to invest right now. By splitting it down the middle, I could bag a combined 632 shares in Rathbones (LSE: RAT) and Tesco (LSE: TSCO).
With £1,500, I could buy 95 Rathbones shares at £15.76 per share. The remaining £1,500 would buy me 537 Tesco shares at £2.79 per share.
Here’s why I like both stocks!
Contrasting share price performance
Rathbones provides a variety of wealth management and investment management services.
Tesco is one of the largest supermarket businesses in the UK with a global presence too.
Rathbones shares are down 23% over a 12-month period, from 2,050p at this time to current levels of 1,576p. Conversely, Tesco shares are up 12% over the same time period, from 249p at this time last year to current levels of 279p.
Pros and cons
Rathbones’ position as the largest discretionary wealth fund manager appeals to me. This position came about through the merger with Investec. Rathbones’ position, profile, track record and reputation help build my investment case. However, I do understand past performance is not a guarantee of the future.
Next, although Rathbones shares have dropped, I’m not concerned. In fact, I view it as an opportunity to buy cheaper shares. They currently trade on a price-to-earnings ratio of 10.
From a bearish view, macroeconomic volatility is probably what’s caused the shares to slide. Continued turbulence could hurt performance and returns as consumers may have less to spend on investments while they battle soaring energy food prices. Furthermore, debt levels are a bit higher than I’d like. Paying these down may take precedence over investor returns.
Moving to Tesco, the fact it has the largest market share of all the supermarket businesses is a plus point for me. It offers it a sense of defensive ability due to the essential nature of its offering. Furthermore, it has recently invested heavily in digital channels to keep up with the times and make the most of the changing habits of consumers and the e-commerce boom. Finally, its popular Club Card loyalty scheme has been a huge hit, and helped performance and market share grow.
Tesco shares look good value for money too, on a price-to-earnings ratio of just over seven.
From a risk perspective, rising costs due to inflation could hinder profit margins and returns. More importantly, supermarket disruptors Aldi and Lidl continue to chip away at Tesco’s dominant market share as consumers look to get more bang for their buck. These issues could hurt performance and returns.
Breaking down the numbers
Although dividends are never guaranteed, the current dividend yield on offer from both stocks is attractive. Rathbones offer a yield of 7.5% and Tesco 3.9%. Both yields are above the FTSE 100 average of 3.8%.
Rathbones shares worth £1,500 could earn me £112.50 in dividends. With Tesco shares, I could earn £58.50 from a £1,500 investment.
I don’t have £3K spare right now, but the above explains the maths, method, and investment case around how I could build a second income stream with just two stocks.
