Reckitt Benckiser (LSE: RKT) has just posted much better-than-expected results, as demand for its brands, including Nurofen and Strepsils, has soared. In fact, its OTC (over-the-counter) “portfolio grew over 20% in the quarter, driven primarily by Mucinex sales, which benefited from a sharp improvement in cold and flu sales trends”. 

Q3 results

Driven by high OTC demand, like-for-like sales rose 3.3% to over £3bn, while analyst consensus was an expected 0.7% drop. And full-year net revenue growth guidance is now up to between 1% and 3% year-on-year, compared to a Q2 estimate of between 0% and 2%. Encouragingly, the company has maintained its guidance on profit margins in the face of high inflation. But growth is expected to be slower than in 2020, when the global demand for cleaning products like its disinfectant brand Dettol saw revenue rise 12%.

However, with pubs, bars and nightclubs now all fully open, sales of its market leading Durex condoms brand also rose. The company said that “strong growth in intimate wellness continued, up mid-single-digits”. And as autumn turns to winter, the temptation of a warm pub surrounded by friends means punters will be more likely to need Reckitt Benckiser’s cold and flu remedies as well. 

A stock to buy now?

At 5,946p, the Reckitt Benckiser share price is up 6% in just five days. But it’s down 13% from 6,852p earlier this year. And with a five-year average of 6,551p, I think there’s significant upside potential for the stock. But it’s worth noting that its dividend yield for the past three years has been around 2.8%. And the FTSE 100 average is predicted to be around 4.1% in 2021. Therefore, it needs to see significant share price growth to beat the index return (and inflation).

And of course, Reckitt Benckiser has the same pressures as the rest of the FTSE 100. In its Q3 report, it warned that raw materials had increased in price by 10% over the quarter. And if it wants to maintain the same profit margins, then the prices it charges will have to rise. CEO Laxman Narasimhan has said that “there will be another round of pricing we will take to offset the inflation”. And with a cost of living crisis currently escalating, some consumers may not feel able to justify spending significantly more on branded products. 

But I think Reckitt Benckiser has such a large portfolio of widely used brands, that I’m confident it will be able to build on its latest performance. And I’m fairly sure that sales are going to rise in the short term. For me, it’s a stock to buy now. And my colleague, Christopher Ruane, agrees with me.

The post 1 stock to buy now for the ‘worst cold ever’ appeared first on The Motley Fool UK.

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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has recommended Reckitt plc. 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.

At 3,326p today, its share price is up 173p in the past five days. It’s also increased from when I last considered the stock back in June. And over the past year, it’s up a whopping 58%. Of course some perspective is important. The company was hit hard by the pandemic. Its restaurant chains were forced to close, and overnight hotel stays were banned. On 21 February 2020, the Whitbread share price was 4,769p, and a month later, it had hit a low of 2,341p. And by September 2020, it was 2,062p. So while the share price may have recovered some ground, it’s still 30% lower than its pre-pandemic price. But I think if the economic recovery continues, it could get back there by this time next year.

Interim results

The FTSE 100 stock published strong interim results on Tuesday. Revenues in H1 hit £661.1m, more than double the £250.8m reported in the same half last year. However, this was still 39% below pre-pandemic levels. This was because only essential business guests were permitted to stay in hotels until 17 May, and restrictions weren’t completely lifted until ‘Freedom Day’ on 19 July. But in September, accommodation sales were up 9.7% year-on-year.

And encouragingly, Whitbread reported a loss of only £56.6m, which was £310.8m less than the loss reported last year. And it’s worth bearing in mind that as a hotelier and restaurateur, many of the fixed costs are inescapable. However, the group made a £235.6m profit before the pandemic. And the company’s lenders have banned dividend payments until things improve, which isn’t expected to be until at least March 2023. But I’m a long term investor. That’s no time time at all for a stock I’ll hopefully be holding until retirement.

FTSE 100 stock’s future

Now that the pandemic seems under control (at least for now), Whitbread is finally starting to see some upside. But it’s not immune to the challenges faced by every other FTSE 100 firm. The lack of labour, increased raw material costs and lorry driver shortages are all putting pressure on the company, at a time when it’s seeking to minimise costs. It’s had to spend £23m on increasing salaries and paying out bonuses.

But its expansion into Germany is going well. “Total open and committed pipeline is now at 73 hotels,” and German revenue is up 197.3% over FY20. Room occupancy grew to 47% in Q2, and then to 60% in August and September. And the company remains “confident in our ability to execute acquisitions at good returns in Germany”.

Of course, in this inflationary environment, the current economic recovery remains fragile. And the pandemic is not over yet. Another lockdown this winter would spell short-term disaster for Whitbread. But I think the current price point is still very attractive for me on the balance of risk and reward.

The post Is this FTSE 100 stock a steal right now? appeared first on The Motley Fool UK.

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Charles Archer owns shares of Whitbread. The Motley Fool UK has no position in any of the shares mentioned. 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.

I’m glad I did. The Deliveroo share price has fallen 17% since then, from 362p to 300p as I write. But it’s up 24% in the past six months, and 4% in the past year. And after today’s Q3 results, I’m now tempted to add some shares to my portfolio.

Q3 results

The company’s key takeaway was “continued strong performance, with robust consumer engagement post-re-openings”. Full-year gross transaction value growth guidance was increased to 60%-70%. Investors were previously told to expect an increase of 50%-60%. GTV in Q3 alone was £1.6bn, a 58% year-over-year increase.

However, the company’s monthly active users fell by 300,000 to 7.5m. That’s a big concern for a growth stock. But average customer frequency stayed stable at 3.3 times a month in Q3 “despite the widespread removal of lockdown restrictions”. Some perspective is important though. Orders were up 64% to 75m orders in Q3 2021 compared to Q3 2020. And the company has expanded its food offering to 10,000 grocery delivery partners. 

CEO Will Shu commented that he expects the Deliveroo share price to show “further strong performance in the remainder of the year”. This positivity is exactly what I was looking for back in August.

Partnership promise 

On 15 September, the company launched a successful Plus partnership with Amazon. All UK and Ireland Amazon Prime subscribers are now entitled to a year’s free Deliveroo Plus membership. This grants subscribers unlimited free delivery on orders over £25/€25. Since the partnership started, Plus membership has doubled. And many of these new subscribers will be using the Deliveroo for the very first time.

It has also seen promising results from the launch of Deliveroo Hop, a London-based trial in partnership with Morrisons. Customers will be able to get grocery deliveries in as little as 10 minutes. And because availability is updated in real time, there’s no substitutions. Deliveroo has also launched a new partnership with Boots. Deliveroo is now delivering to every town in the UK with a population of over 50,000 people. I think it could become the primary delivery partner for most of the high street. 

Legal issues for the Deliveroo share price

In August, I was worried that the February Supreme Court ruling over Uber that forced it to reclassify some contractors as employees. This precedent could possibly be extended to Deliveroo contractors. However, my concerns have been somewhat alleviated. That’s because Deliveroo has enhanced benefits for most of its contractors, including parental leave and sick pay. UK Deliveroo riders now receive a £1,000 payment after the birth of a child. I think this makes legal action less likely. Contractors who value the freedom of self-employment are now also receiving some of the benefits of employment. 

My bottom line is that Deliveroo has shown continued post-pandemic growth, while also improving contractor conditions. And the Deliveroo share price has fallen 17% just before the lucrative Christmas period. I think now is an excellent entry point for me.

The post Why the Deliveroo share price might now be justified appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charles Archer owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Deliveroo Holdings Plc, Morrisons, and Uber Technologies and has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. 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.

However, I was bullish on Netflix. And it turns out I was right. Since 31 July, its share price has shot up 23% from $519 to $639 today. And it’s up 21% in the past year. As a current investor, I’m obviously happy that my investment has done so well. But this is the kind of performance I’d hope to get out of my more speculative stocks. So what’s going on?

Subscriber growth

The streaming company delivered its Q3 results today. Revenue is up 16% year-over-year to $7.5bn, while operating income rose 33% to $1.8bn compared to Q3 2020. Netflix now has earnings of $1.7bn, a 17% increase year-over-year.

It added an additional 4.4m subscribers, which was 900,000 more than projected. It added 1.5m extra last quarter, and 2.2m in Q3 2020. Moreover, it expects to add 8.5m more subscribers in Q4. And average revenue per membership also rose 7% this quarter. 

There’s more good news. While Netflix lost 430,000 North American subscribers in Q2, its reversed this trend and has added North American subscribers in Q3. And encouragingly, half of its new Q3 subscribers came from the Asia-Pacific region, which is a key geographical area for growth.

Unique content

One key concern I had for the Netflix share price was that the company’s original series would lose out to competition from Disney, Apple, and Amazon. But Netflix now holds a 45% market share in global demand for original shows. Runaway hit Squid Game was streamed by 142m households in just 28 days. According to Parrot Analytics, this made it the most watched show in the world between September 26 and October 16. 

And with new series of Stranger Things, Sex Education, The Witcher, Tiger King, and Cobra Kai, there’s plenty more content with that unique Netflix flavour to consume. The streamer is also purchasing the Roald Dahl Story Company. And the company expects its “strongest Q4 content offering yet”. 

It’s also launching into online gaming. I’m a little concerned about this as diversifying from its core business could put it off track. But the company has plenty of cash to experiment with — and as a long-term investor, I’d rather they spend it on growing than let cash reserves build unnecessarily high. It has just acquired the Night School Studio, and is already developing new games. Initially, gaming content will be available free to subscribers, which will give the service a unique selling point. And with Netflix boasting 214m subscribers worldwide, it’s even possible it could become a global gaming giant.

My bottom line for the Netflix share price

Competitors Disney, Apple, and Amazon all want a slice of the streaming pie. These aren’t the sort of competitors that can just be ignored.  I expect many consumers will want to subscribe to Disney+ to watch original Marvel and Star Wars content. And with a cost of living crisis descending on consumers, many will be forced to choose between streaming providers. But I think, for now, that Netflix is destined to grow. I may be adding to holding.

The post Why the Netflix share price could have even further to go appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charles Archer owns shares of Amazon and Netflix. The Motley Fool UK owns shares of and has recommended Amazon, Apple, Netflix, and Walt Disney. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. 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 Intel (NASDAQ: INTC) share price is up 2.8% over the past month to $54 today. Okay, that’s the price it was this time last year. But it’s risen 55% over the past five years. And it spiked to $69 in April. And I think it could be the dark horse of 2022.

The semiconductor shortage

One of the biggest global trade problems right now is the global semiconductor (chip) shortage. Initially this was caused by the rapidly increased demand for computer hardware to aid remote workers throughout the pandemic. And the homeworking transformation seems here to stay. But the shortage is now causing car plants worldwide to slow production. The problem is acute as electric cars are the fastest growing sector in the market, and they require double the chips of a standard carbon-fuelled car. There’s shortages of virtually every electronic device, from mobile phones to PlayStation 5’s. The demand for chips is higher than its ever been. And the industry hasn’t been able to keep up with the increased demand.

Why is this important for the Intel share price?

Intel is the largest semiconductor manufacturer in the world by revenue. It’s also the developer of the x86 series of microprocessors which are found in almost all personal computers. At first glance, I’d have thought that the heightened demand for chips would have sent its sales and share price soaring. However, I think the Intel share price has remained flat as it has only been able to maintain a steady supply in the face of this vastly increased demand. But next year, I suspect its output will rise, and revenues with it. 

On Thursday, the company will release its Q3 results. Its Q2 results reported adjusted earnings per share of $1.28, some 22 cents higher than analyst expectations of $1.06. Revenue increased 2% year-over-year to $18.5bn. However, competition from Advanced Micro Devices has put a dent in its performance this quarter. It expects an adjusted gross margin in Q3 of 55%, far below the 59.2% seen in Q2. Moreover the average selling price of its chips used in laptops fell 17% year over year. While the demand for semiconductors remains high, the competition for sales is also fierce. Its strategy of price reductions to maintain competitivity is suppressing the Intel share price.

A brighter tomorrow

Intel is developing technology to manufacture significantly smaller chips. This will give it a competitive edge as it will be able to fit more chips onto the same sized area, leading to increased efficiency and performance. In fact, these new Intel 4 chips will increase performance per watt by 20%. It’s also confident that it can increase their computing power another 18% by 2023. 

The company is heading into 2023 with a price-to-earnings ratio of just 12. With a new competitive advantage and huge demand for its product, I don’t think the share price is going to stay where it is for much longer. And this constant demand also makes it a good defensive pick for my portfolio in case of a stock market crash. Of course, AMD won’t just be sitting on the sidelines. But I think it’ll be some time before the competition catches up.

The post Why the Intel share price is my dark horse of 2022 appeared first on The Motley Fool UK.

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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Advanced Micro Devices. The Motley Fool UK has recommended Intel and has recommended the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. 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.

I think that opening up a Stocks and Shares ISA is the best way to start investing. However, before buying any shares, I think there are some important first steps to consider. This is how I’d begin today.

First priorities

First, I’d pay off all debt, excluding my mortgage. The average UK credit card debt stands at £2,592, with an interest rate of 20%. A competent long-term investor is unlikely to make a 20% return, so paying off debt should always take precedence over investing.

Then I’d save an emergency fund. I think the average UK worker with a wage of £2,000 a month, should save three months’ of expenses — so about £6,000. It would need to be kept in a low-interest instant-access account, so I wouldn’t save more than this as my capital would slowly be eaten away by inflation. 

Then I’d make sure that I was making the biggest pension contribution possible, as there are significant tax benefits that are likely to outweigh any investing returns. And as I’m under 40, I’d open a Lifetime ISA (LISA). If I save £4,000 a year, the government will top up my savings with a £1,000 tax-free bonus. Again, I see this as a no-brainer, as I don’t expect to beat a 20% annual return investing in shares.

Stocks and shares ISA

Then I’d open up a Stocks and Shares ISA. Its huge advantage is that there’s no income tax due on the dividends or capital gains tax on profits. And this advantage is unlimited — so an initial investment could grow many times over tax-free through the power of compound interest.

So what would I buy? I’d start with investing in a full replication FTSE 100 index tracker fund. These are very popular for new investors as instead of aiming to outperform the FTSE 100, these funds invest in all 100 stocks. This makes them cheap as there are no management fees, and provides a diversified investment product with very low comparative risk. And I could buy into a FTSE 100 tracker fund inside my Stocks and Shares ISA with most providers. 

Then I’d buy low-risk companies like Tesco or Unilever, to build up my investing confidence. The benefit of blue-chip companies like these is that they have stable share prices with reliable returns, although nothing is guaranteed, of course. I’d also put some capital in passive income stocks. Examples include National Grid and Aviva, which both pay a 5% dividend. This should represent a good return with little risk for me.

Once I had more confidence, I’d start looking for UK penny stocks with high growth potential. These are shares that cost under £1 each. These can make huge returns, but of course, there’s also the potential to lose most of my investment. This means that I’d have to keep these stocks under constant review. Currently, I like Stagecoach and restaurant group Fulham Shore. I think both stocks are likely to see high growth as travel and hospitality rebound post-pandemic. In the longer term, I also like Bacanora and Premier African Minerals. Both are higher-risk, but could see huge shareholder payoffs as the EV revolution takes off.

The post How I’d start investing using a Stocks and Shares ISA appeared first on The Motley Fool UK.

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Charles Archer owns shares of Aviva, Bacanora Lithium, and Unilever. The Motley Fool UK has recommended National Grid, Tesco, and Unilever. 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.

At the end of September, I wrote about the ‘October Effect’ on FTSE 100 shares. Because many investors believe that stock markets are likely to crash in October, they sell their shares — which is what actually causes them to dip.

And yes, there’s plenty of other reasons why some stocks are falling right now. Inflation, rising interest rates, supply chain issues, the labour shortage, and energy crisis are all causing jitters. However, I think now is a great time for me to buy resilient FTSE 100 shares that have fallen on fear, not fundamentals.

FTSE 100 mining and manufacturing

Rio Tinto is one of the largest miners in the world, producing iron, copper, gold, diamonds, and uranium. At 4,095p, its share price is down more than 7% in the past month. This is despite generating $13.7bn of revenue in H1 2021, 143% higher than in H1 2020. It has also spent $324m so far this year on exploration (PDF). And it has positioned itself as the largest source of lithium in Europe, which appeals to me as a believer in the EV revolution. Okay, iron ore prices have fallen dramatically since May, due to weakened Chinese demand. But I think that as long as the Evergrande situation doesn’t develop into a Chinese financial crisis, iron prices will go back up, and Rio Tinto shares with them.

Melrose Industries buys struggling engineering companies before turning them around and selling them at a profit. At 165p, its share price is down 8% in the past month and 16% year-to-date. Unfortunately, the company was invested in multiple aerospace-dependent companies prior to the pandemic, which have sustained huge losses. And its automotive divisions are also losing money. That’s because even though demand is strong, the semiconductor shortage is making it impossible to deliver orders on time. Raw material price increases are also hurting the FTSE 100 company’s bottom line. But I think that these are short-term issues. Once they’re resolved, the share price could shoot back up.

Betting and publishing

Entain is the global sports betting and gaming company that owns Ladbrokes and Coral. Its share price has dipped to 2,073p over the past week, but it’s still up almost 100% over the past year. Competitor DraftKings has approached the company with a £16.4bn takeover offer. Moreover, Q3 results showed it’s had 23 quarters in a row with double-digit online growth. BetMGM, its partnership with MGM Resorts, held a 23% market share across the US in sports betting between June and August. So the FTSE 100 stalwart could become the biggest sports betting operator in America. However, a regulatory crackdown is becoming increasingly likely.

Informa is a publishing, business intelligence, and exhibitions group. Its share price is 553p today, down from 582p a week ago, but up from 475p in July. The company was hit hard by the pandemic, as it was unable to run the exhibitions that make up a core part of its business strategy. But it has been on the rise since ‘Freedom Day’ back in July. I think that as the country unlocks, revenue will increase and its share price will soar. In H1 2021 results, it posted a strong free cash flow of £134m, almost double the £71m of H1 2020. It also reduced net debt by £100m to £1.89bn. Of course, any future lockdown would hit the FTSE 100 firm hard.

The post FTSE 100 shares to buy on sale right now! appeared first on The Motley Fool UK.

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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has recommended Melrose. 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 Oxford Nanopore (LSE: ONT) share price is falling. At its IPO on 30 September, its shares were valued at 425p. They then rocketed 50% to 615p the next day. However, in the past two weeks, its share price has fallen to 548p. Yes, some early investors will be taking profits. But what else is going on?

The business model

The company has “developed a new generation of sensing technology that uses nanopores embedded in high-tech electronics to perform precise molecular analyses”. In plain English, it’s a market leader in DNA and RNA sequencing technology. The company has developed products that analyse DNA by moving DNA samples through tiny holes (nanopores) and measuring how they react to electrical currents. 

Its flagship product, the MinION, is the only portable real time DNA/RNA sequencer on the market. It has dozens of current applications, including identifying viruses, monitoring Ebola, environmental tracking, antibiotic resistance surveillance, food safety monitoring, cancer analysis, agricultural development, and foetal DNA analysis.

The technology can also be used to monitor air conditioning and check airports for pathogens. And its portable nature makes it valuable for doctors visiting patients at home, as well as for paramedics in ambulances. The future possibilities are endless, and the potential to generate significant revenue is very real. I can understand why the share price initially shot up so high.

Financials

Prior to the IPO, Oxford Nanopore’s revenue rose from £52m in 2019 to £113.9m in 2020. This was largely due to government contracts for coronavirus testing kits to help tackle the pandemic. However, even though the company nearly doubled its revenue, it still hasn’t posted a profit. But as a growth stock, investing income into research and development isn’t unusual. And with the prospect of elevated returns in the future, some investors seem prepared to wait for the company to become profitable. 

However, in this current inflationary environment, interest rate rises are just around the corner. So I think loss-making growth stocks are particularly vulnerable right now. Analysts don’t expect the company to hit profitability until 2026. And even then, there’s no guarantees. In its latest figures, Oxford Nanopore brought in revenue of £59m for the first six months of this year, making another loss of £44.4m.

On the plus side, CEO Gordon Sanghera has control over a special share to veto an unwanted takeover in the next three years. This means that the biotech firm won’t be subject to a hostile takeover during its expansion stage. This does appeal to me as a long-term investor.

My verdict for the Oxford Nanopore share price

The Oxford Nanopore share price is still 30% higher than its IPO two weeks ago. But I think some of this rise is because investors became overly excited about a rare UK biotech listing. And I believe its technology could soon be replicated elsewhere. As profits seem to be years away, I’ll be ignoring the Oxford Nanopore share price. It might be revolutionary, but I worry about the company’s financial prospects as monetary policy tightens.

The post Why the Oxford Nanopore share price is falling fast appeared first on The Motley Fool UK.

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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Inflation is rising, and interest rates are likely to follow. That’s because unlike other political problems, there’s only one solution to high inflation — making borrowing more expensive. But this could cause a crash. Here’s why.

Multiple inflationary factors

The labour shortage is causing wages to rise, while the supply chain crisis is simultaneously causing supply to fall. Raw material price increases are now hitting basic goods like food. Kraft Heinz CEO Miguel Patricio said yesterday that inflation was “across the board“, and that, “we are raising prices, where necessary, around the world“. As economies have restarted, production has not been able to keep up with increased demand.

The ongoing petrol shortage is a good example of inflation in action. There’s far higher demand than during the pandemic, but not enough petrol being delivered to cope. This has led to petrol prices increasing. Oil prices are also now at historic highs, and these price increases will soon feed back to consumer goods. The gas shortage has sent multiple smaller suppliers to the wall. Meanwhile, the largest energy suppliers are now losing money from the gas they’re selling. When the price cap rises again in April, so will everybody’s bills. Far from being transitory, it appears to me that inflation is here to stay. 

Inflation and interest rates explained

The Bank of England’s annual inflation target is 2%. That means that a product that costs £1 now will cost £1.02 a year from now. This incentivises consumers to spend money, which helps to grow GDP. If inflation falls below this target, demand falls as well, because the incentive to spend is removed. If it rises too high, disposable income becomes less valuable, so consumers buy less. 

This is how I see the relationship between inflation and interest rates:

The UK is currently in the danger zone. With low growth and high inflation, there’s only two possible scenarios going forward. Either the BoE raises interest rates, which could permanently damage our economic recovery by slowing growth. Or, it lets inflation continue to rise, allowing a cost of living crisis to unfold. 

The high debt trap

Bank of England MPC member Michael Saunders said yesterday that “markets have priced in over the last few months an earlier rise in Bank rate than previously…I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously”. I think this means that interest rates are likely to rise very soon.

This would increase the cost of business debt accumulated during the pandemic. It would also increase the interest due on the UK’s £2trn national debt. For individuals, there will be more interest due on mortgages, credit cards, and loans. Combined with a national insurance rise, council tax rise, and frozen income tax bands, I think next year could see a massive fall in disposable income. This would hit spending hard.

Any company with high debt levels is in danger. It’ll soon be paying higher interest, while also coping with falling consumer demand. Going forward, I’m sticking to blue chip companies with low debt and a proven business model. 

The post Why rising interest rates could cause a crash appeared first on The Motley Fool UK.

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Charles Archer has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Why dividend stocks?

I think dividend stocks are one of the best ways to create passive income. That’s because once you’ve bought your stocks, you can keep enjoying the dividend income for life. Really there’s only two things I worry about. The first is deciding how much of my dividends I should reinvest to take advantage of compound interest.

And the second is keeping an eye on my holdings, just in case I might need to sell. To reduce this burden, it’s important to try to pick stocks that will generate steady returns over many years. This doesn’t mean the stocks with the highest dividend yields right now. That’s because then I’d have to actively manage my portfolio in case the dividend drops. Instead, to create income that’s truly passive, the highest yield dividend stocks have to be ignored in favour of the most reliable ones.

Investing in a FTSE 100 tracker fund would yield about 3.4% this year. As a baseline, this is a far better return than any cash savings account I could get right now. But what I’m looking for are stable share prices with yields that beat the FTSE 100 average. 

Truly passive income stocks

1) Aviva has a current dividend yield of 5.3%. At 400p today, it’s recovered from the mini-crash of March 2020, and it’s averaged 422p over the past five years. It’s an insurance provider, and that’s what makes it attractive to me as a passive income stock. That’s millions of us making regular home, life, car, and pet insurance payments every month. And I don’t think that’s ever going to change. The company has also been exiting European and Asian operations, most recently divesting its last European business, Aviva Poland, for £2.1bn. In total, this has generated £7.5m. And a “substantial portion” is to be returned to investors.

2) National Grid has a dividend yield of 5.4%. Its share price is 891p, against a five-year average of 906p. Spanning the US and the UK, the utility company supplies gas and electricity to millions of customers. Encouragingly for a passive income stock, it’s future-proofing. It launched a $250m technology fund in 2018 to invest in green energy alternatives. And having received regulator approval, it’s buying Western Power Distribution, the largest electricity distribution company in the UK. Of course, rocketing gas prices are a concern, as is the small risk that utilities could be nationalised.

3) Tesco has a dividend yield of 4%. Its share price is 254p against a five-year average of 271p. It’s the UK’s largest grocery retailer, having cornered over a quarter of the available market share. Food, like insurance and energy, is something we can’t live without. I’m confident that this retailer will continue to pay strong dividends for years to come. It is having supply chain issues caused by the HGV driver shortage, which could eat into its important Christmas income. But it’s my third stock choice I think I could buy and derive passive income from forever.

The post Top 3 truly passive income stocks to buy now appeared first on The Motley Fool UK.

More reading

• Is now a good time to start investing in the wealth-building stock market?
• £10,000 invested in red-hot Tesco shares just 1 week ago is now worth…
• See the income from investing a £20k ISA in this UK stock before it goes ex-dividend on 9 April
• What’s going on with the AstraZeneca share price now?
• This S&P 500 stock is down 30% and the CEO just bought $10m worth of shares

Charles Archer owns shares of Aviva. The Motley Fool UK has recommended National Grid 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.