Throughout 2023, numerous banks and analysts have been consistently asserting that the UK stock market is undervalued.

For example, analysts at Schroders conducted research showing that from pretty much every angle you look at them, British shares are exceptionally cheap.

Financial institutions such as Morgan Stanley attribute low valuations to a range of factors. This includes the pessimistic sentiment that followed last year’s mini-Budget meltdown.

Thus, the consensus among the experts appears to be that the market is cheap. If that’s truly the case, it potentially creates a hugely advantageous entry point for investors seeking long-term value.

Unlocking the potential of cheap shares

Undervalued stocks often represent an attractive investment opportunity. After all, it raises the prospect of building serious wealth over time by capitalising on temporary market misplacing.

When a stock is deemed to be cheap or undervalued, it usually means that its market price is considered lower than its intrinsic value. This could be for any number of reasons, ranging from industry misconception to overly negative market sentiment.

Savvy investors who recognise this are in a position to acquire such stocks at a discount. The subsequent expectation being that their true worth will eventually be recognised in due time.

In this way, as the market corrects and share prices rise to better reflect underlying values, investors stand to benefit from some potentially lucrative capital appreciation.

Willingness to be in it for the long haul

That’s all well and good, but it’s worth remembering that this approach demands patience and a long-term perspective. For me to benefit from this potential opportunity, I’ll have to be willing to embrace an investment horizon. Perhaps one that spans years or even even decades.

This will give me sufficient time to overcome the inevitable volatility in financial markets by riding out the short-term peaks and troughs.

Moreover, it’s important to note that while the general consensus suggests the market as a whole is undervalued, this doesn’t imply that every individual UK stock is cheap. Variations in business performance, sector-specific challenges and company-specific factors can lead to divergences in valuations.

A number of stand-out opportunities

Nevertheless, when I survey the FTSE 350, a number of stocks in particular stand out. This includes the likes of Lloyds (P/E: 5.7) and Hargreaves Lansdown (P/E: 10.5). The two companies enjoy well-established market positions and even possess a few decent growth opportunities in my eyes.

In the long run, Hargreaves Lansdown stands to benefit as people save and invest more within their ISAs and SIPPs. Meanwhile, Lloyds’ core focus on growth is resulting in around two thirds of the £3bn strategic investment announced last year going towards growing and diversifying revenue.

As a result, the two companies look significantly undervalued to me, trading at prices that could even turn out to be decade-defining opportunities to build serious wealth. If I had any spare cash to invest, I wouldn’t hesitate to buy some shares of both.

The post Are cheap UK stocks a decade-defining opportunity to build long-term wealth? appeared first on The Motley Fool UK.

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• Buying £20k of Lloyds shares could give me an £851 income this year!

Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown Plc and Lloyds Banking Group 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.

Investing in FTSE 100 shares is a tried-and-tested strategy for generating a consistent passive income stream. The UK’s blue-chip index represents the largest companies listed on the London Stock Exchange, spanning various sectors. This includes industries such as finance, energy and healthcare.

What’s more, a handful of these companies have a proven track record of stability and resilience. This is essential for investors looking to build a reliable long-term income stream.

Today, I’m taking a closer look at two of them. And if I had any cash sitting on the sidelines, I’d snap up some shares in both. By holding for the long term, I could potentially transform a small initial sum into substantial wealth over time.

A utility stock with growth opportunities

National Grid (LSE:NG.) is one of the world’s largest publicly listed utilities. Its focus is on the transmission and distribution of electricity and gas, which means the company plays a critical role in connecting millions of people to the energy they need. 

The group has placed itself right at the heart of the electric revolution. To illustrate, massive investment has been going into its asset base to drive the energy transition forward. In return for investing billions to maintain and upgrade its infrastructure, regulators in the UK and US allow National Grid to earn a decent profit. Moreover, there’s even potential to earn more if it exceeds targets.

However, being a monopoly in need of regulation is a mixed blessing. After all, it leaves the group’s fortunes largely in the hands of regulators such as Ofgem. Consequently, regulators essentially get the final say when it comes to profits. In my view, this represents the biggest drawback when it comes to investing in National Grid.

Nonetheless, the company boasts an attractive yield of 5.6% and aims to grow dividends per share in line with the Consumer Prices Index including owner occupiers’ housing costs (CPIH). As such, I think it ticks all the right boxes in relation to my search for high-quality stocks I could buy today to start building a reliable second-income stream.

A world-leading asset manager

For 186 years, Legal & General (LSE:LGEN) has provided financial services to customers across the UK. On the back of a successful track record, the company is now a global provider of retirement solutions to corporates and individuals.

Recent performance has been solid too, with the group well on track to meet its targets over the period of 2020-24. Most notably, this includes growing dividends at 5% a year and capital generation of £8-£9bn. While ambitious, the group’s outstanding solvency II ratio (a core measure of capitalisation) is more than sufficient to ensure that a whopping yield of 8.8% is well supported.

That said, dividends are never guaranteed. Several factors can influence a company’s decision to distribute dividends, and economic conditions, financial performance and management decisions all play a role. For example, unexpected economic downturns often impact a company’s ability to maintain shareholder payouts.

All in all, though, the future looks bright in my eyes. Each one of Legal & General’s four businesses is innovating and expanding globally, adding new products and solutions that should help facilitate the achievement of strategic goals.

The post 2 FTSE 100 shares I’d buy today to start generating long-term passive income appeared first on The Motley Fool UK.

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Matthew Dumigan 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.

Even during the best of economic environments, investors can never rule out an unexpected stock market crash. After all, major catastrophic events that nobody saw coming are often the cause.

Since the beginning of 2023, the FTSE 100 has showed little upward momentum, trading broadly sideways. With the current economic landscape shrouded in uncertainty and inflation rates remaining stubbornly high, the looming possibility of a market crash certainly can’t be ruled out.

What’s more, worrying signs came from the US at the end of last month after the S&P 500 briefly entered into correction territory. This development sparked concerns among some investors, raising apprehensions about a potential wider sell-off around the world.

To make matters worse, a handful of prominent investors and analysts have been predicting that a crash is imminent. So with that in mind, here’s what I’d do if the stock market crashes in 2023 or 2024.

Staying calm and avoiding impulsive decisions

Enduring a market crash is something that almost all investors will have to face at some point in their lifetime. But this doesn’t mean it’s a straightforward experience. The sudden plummet in share prices across the board is a scary occurrence even for the most seasoned of investors.

So, to avoid any emotional decision making caused by fear or panic, I’d make every effort to keep calm and avoid impulsive decisions. Emotional reactions will only cloud my judgment and result in decisions that are not aligned with my long-term financial goals.

Keeping money in the stock market

In particular, I’d refuse to get caught up in any panic selling. In any case, pulling money out of the stock market during market downturns usually causes more harm than good in the long term. This is due to market timing risk.

Timing the market is when an investors attempts to buy or sell stocks based on predictions relating to future share price movements. And it’s notoriously difficult.

That said, there are instances of legendary investors predicting catastrophic events such as the 2008 financial crash. For example, The Big Short‘s Michael Burry springs to mind. But the reality is that predicting the optimal time to exit the market before a downturn and re-enter before an upturn is extremely challenging, even for experienced investors. That’s why I won’t be bothering.

Adopting a Foolish investment philosophy

Instead, I’d embrace a long-term investment mindset, encapsulated by the Foolish investing philosophy. By thinking in this way, it doesn’t actually matter to me whether the stock market crashes or rallies in the next six months. This is because the long-term mindset will help me to weather any near-term volatility safe in the knowledge that markets tend to recover over extended periods.

In fact, I’d view any significant market downturn as a chance to acquire high-quality stocks at heavily discounted prices. By strategically buying shares during a crash, I could even position myself for some substantial gains when the market eventually rebounds.

The post What should I do if the stock market crashes in 2023 or 2024? appeared first on The Motley Fool UK.

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• Buying £20k of Lloyds shares could give me an £851 income this year!

Matthew Dumigan 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.

Earning passive income brings with it a bucket load of advantages. It provides financial stability and flexibility, and can be used to help achieve long-term financial objectives alongside retirement planning. As such, it represents a goal for many people around the world.

The advantages of earning dividend income

When it comes to earning passive income in the form of dividends, I believe there are some unique perks. For example, dividend income is practically effortless to receive. Once an investor holds some dividend-paying stocks, the income flows in without the need for much active involvement.

Additionally, holding income stocks can offer a sense of stability as a handful of companies boast a history of reliable and generous shareholder payouts.

With that in mind, how much would I need to invest in dividend stocks to earn a passive income worth, say, £1,000 every month?

Building a sizeable investment portfolio

The first thing for me to note is that it’ll largely depend on the average dividend yield I could achieve on my portfolio. To illustrate, taking the FTSE 100‘s average historic yield of 4%, I’d need a pot worth £300,000. However, if I somehow doubled that yield, I’d only need one worth £150,000.

Something more realistic to aim for would be an average yield of around 6%. In my view, that’s fairly achievable without taking on too much additional risk. At this average yield, I’d be looking at building a portfolio worth £200,000.

Clearly, that’s not a meagre sum. But by embracing a long-term mindset to leverage the power of compounding, reaching such a milestone isn’t as difficult as some may think.

After all, even if I was starting out from scratch, I could build a portfolio worth over £200,000 after 19 years, provided I invested £500 each month and achieved an average annual return of 7%.

Investing in high-quality businesses

Having amassed the required amount, I’d then make sure my portfolio consisted of a diversified selection of high-yield income stocks. That said, a high yield alone wouldn’t be enough to convince me. I’d also want to make sure the payout was well-covered by the company’s earnings.

After all, if a high yield isn’t supported by robust earnings, it’s usually a major red flag. By focusing not only on the yield but also on its sustainability thorough analysis of earnings and payout ratios, I could better strike the balance between attractive income and manageable risk. This will ultimately serve to ensure a more secure passive income stream.

Moreover, diversification would be key in my investment approach. Spreading my investments across different sectors and industries would further mitigate risks associated with economic fluctuations.

That said, dividends are never guaranteed as there is always the risk of cuts or suspensions to shareholder payouts. Companies may reduce or even scrap dividends altogether during economic downturns, financial crises, or when facing operational challenges.

The post How much should I invest in income stocks to aim for £1,000 a month in dividends appeared first on The Motley Fool UK.

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• Buying £20k of Lloyds shares could give me an £851 income this year!

Matthew Dumigan 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.

The last three years have by no means been plain sailing for the Lloyds (LSE:LLOY) share price.

Back in December 2019, the bank’s shares traded for around 64p before plummeting over 60% to 24p at the height of the Covid-19 pandemic.

This means that if I’d have been savvy enough to buy at the bottom, I could have realised a whopping 115% gain by February 2023. Alas, it’s easy to be wise after the event.

Since February, however, performance has been poor. So much so that at today’s price, I could scoop up some shares for around 41p a piece.

With that in mind, could now be an ideal opportunity to buy in? Let’s take a closer look.

Exposure to the UK economy

Fluctuations in global economic conditions, market uncertainties and specific industry challenges have all contributed to the instability experienced by UK banks.

Moreover, Lloyds is one of the nation’s biggest retail banks and mortgage lenders and has virtually no overseas activities. As a result, its fortunes are closely tied to the British economy.

Clearly, investing in a financial institution with such strong ties to a single economy comes with its risks. After all, economic downturn or political instability in the UK threaten to significantly impact Lloyds’ performance more than would be the case for a more international bank such as HSBC.

In my view, that’s particularly concerning given the UK economy is believed to be experiencing renewed signs of stress. This stems from the prospect of high interest rates, continued uncertainty and low productivity.

A group performing well

That said, amid a relatively poor macroeconomic environment, Lloyds appears to be coping well. In fact, last month the group reported a robust third quarter financial performance with strong capital generation.

While net interest margin (NIM) fell quarter-on-quarter to 3.08%, net interest income rose by 1% to £4.5bn and deposits increased by £500m.

That drop in NIM is something to keep an eye on, but it’s encouraging that management remains confident enough to reiterate full-year guidance of NIM greater than 3.1%.

Overall, the solid performance was driven by net income growth, cost discipline and resilient asset quality.

The future is bright

Looking ahead, I’m confident in the long-term outlook for Lloyds. In my eyes, it is well positioned to succeed in driving revenue growth and diversification, and strengthening cost and capital efficiency.

When it comes to strategy, I’m convinced that the core focus on growth stands the group in good stead. To illustrate, around two thirds of the £3bn strategic investment announced last year is aligned to growing and diversifying revenue.

What matters for success here is whether Lloyds can carefully prioritise opportunities across each of its businesses to ensure the group generates value in the near term while simultaneously creating new revenue streams that deliver over the longer term.

All things considered, I’d snap up some Lloyds shares in a heartbeat if I had any spare cash lying around. Today’s price of 41p per share looks like a true bargain from where I’m sitting.

The post At 41p, are dirt-cheap Lloyds shares worth buying in a heartbeat? appeared first on The Motley Fool UK.

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HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group 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.

After Lloyds (LSE:LLOY) reported a solid set of third-quarter results in an interim management statement, released on 25 October 2023, it’s hard to deny that the bank’s outlook feels optimistic.

Despite this, the shares are down 13% since the beginning of the year. In addition, they’re approximately 27% lower than they were five years ago.

All of this means that the bank’s valuation still sits at a severely discounted level. As such, I’m convinced that now could be an ideal right time to load up on some dirt-cheap shares.

Beating profit forecasts despite a reduction in lending

The third-quarter profits reported by Lloyds were better than expected. To illustrate, statutory profit before tax was £1.9bn in the third quarter. That’s slightly above forecasted expectations of £1.8bn.

What’s interesting is that the jump in third-quarter profits comes despite a reduction in lending to customers amid tough macroeconomic conditions. For that, Lloyds has higher interest rates to thank.

But it wasn’t all good news. Net interest margin (NIM), which is a measure of profitability in borrowing/lending, fell to 3.08%. This figure is down from 3.14% in the previous quarter and is slightly lower than what the markets had expected.

The key risk consideration here is that a declining NIM indicates that a bank is earning less from its core lending activities. Put simply, banks make money by borrowing at lower interest rates and lending at higher rates. Thus, a shrinking NIM suggests reduced profitability in this essential operation.

That said, it’s encouraging that management remains confident enough to reiterate full-year guidance of NIM over 3.1%.

A generous dividend yield

Capital levels at Lloyds remain strong. So much so that they not only support dividend payments, but also set the stage for returning surplus capital at the end of the fiscal year. That’s an attractive proposition for those seeking dividend income.

The prospective dividend yield sits at a whopping 7.5%, far exceeding the FTSE 100 average. But as always, nothing is guaranteed. After all, economic downturns, unexpected expenses, or changes in market conditions can affect a company’s ability to distribute shareholder payouts.

Waiting for the market to recognise the value

Despite the performance boost from higher interest rates, Lloyds continues to trade at a 30% discount to the book value of its assets.

But as the group continues to deliver consistent profitability and capital returns to shareholders, it feels to me like it’s only a matter of time before patient investors are finally rewarded.

Although for that to happen, the market will have to recognise the true value of Lloyds shares. And therein lies a major caveat as I contemplate buying in. Namely, I must be prepared to stomach more uncertainty over the short term by embracing a longer-term investment horizon.

Nonetheless, if I had any cash to spare I’d eagerly hoover up some discounted shares.

The post Is now finally the right time to buy dirt-cheap Lloyds shares? appeared first on The Motley Fool UK.

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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group 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.

In the world of investing, names like Warren Buffett need no introduction. The so-called Oracle of Omaha has amassed a fortune by investing in the stock market and he shows no signs of slowing down.

I’m imagining a scenario in which Buffett himself was considering investing in some British stocks, searching for those gems he could entrust his capital with for two decades or more.

With that in mind, I’m sharing the two FTSE 100 stocks that I think not only catch the eye of many prudent investors, but also align with the principles that have made Buffett the legendary investor he is today.

A global business with popular brands

Buffett famously said that if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes. In my view, part of this means searching for companies with well-established track records and enduring fundamentals.

Established over a century ago, Unilever (LSE:ULVR) is one of the world’s largest consumer goods companies. And in my opinion, it embodies the qualities of a company worthy of a decade-long commitment, if not way more.

The group’s success has been built on its well-known and trusted brands, of which it now has over 400. This level of brand power means that on the average day, 3.4bn people use a Unilever product.

However, protecting the quality of those brands comes at a significant cost. To illustrate, brand and marketing investment rose €0.4bn over the last half year and increased spending is expected to continue. Too much spending could impact short-term profitability, potentially leading to lower earnings.

Nonetheless, there are still opportunities for further growth over the long term. For instance, the company has committed to sharpening its focus and investment in key growth markets. And then to top it all off, the group’s valuation currently sits below the longer-term average.

A leading international bank with a competitive advantage

The concept of margin of safety is a term used Buffett employs to determine if he’s paying a good price. And he places a lot of emphasis on it. So much so that he once said the three most important words in investing are ‘margin of safety’.

In simple terms, it’s the difference between a stock’s intrinsic value and its current market price. This disciplined approach provides a cushion against unforeseen market challenges and maximises the potential for long-term gains.

One Footsie stock that I think is trading significantly below its intrinsic value is Standard Chartered. While there are concerns stemming from China’s commercial real estate sector woes, I’m a huge fan of the bank’s exposure to Asian markets.

After all, it gives the bank an opportunity to tap into the potential of emerging and high-growth markets, as well as more established economies.

With a presence in more than 50 countries around the world, Standard Chartered is a well-diversified beast with experience and capabilities that I think sets it apart from competitors.

Considering all of the above, I reckon Buffett would be eager to buy and hold for the long term given the current P/E ratio of 8.5.

The post The 2 FTSE 100 stocks I think Warren Buffett would buy and hold for 20 years appeared first on The Motley Fool UK.

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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Standard Chartered Plc and Unilever 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.

The short-term direction of the stock market is almost impossible to predict. In fact, I don’t think it’s even helpful for investors to dwell too much on the question of whether the market will rally or crash next year.

That being said, with a handful of top investors and analysts saying there’s a sell-off lurking around the corner, I’d be foolish if I failed to prepare for the worst-case scenario.

With that in mind, here’s my plan for navigating a potential 2024 stock market crash.

Building a resilient portfolio

Almost every investor knows the significance of diversification. It involves spreading investments across different sectors and geographic regions. And in the case of a market crash, having a well-diversified investment portfolio can help cushion the impact of plummeting share prices.

As such, I’m looking to buy stocks that tend to fare less poorly during market downturns. This likely means searching for companies in defensive sectors such as healthcare, utilities, and consumer goods.

Even in market crashes caused by macroeconomic downturns, people will always need essential services and products. As a result, these sectors can be less susceptible to the wider market volatility. Be that as it may, it’s worth remembering that a stock market crash ultimately affects share prices across the board.

Embracing the long-term perspective

Alongside building a diversified portfolio, adopting a long-term investment horizon will help me withstand temporary market fluctuations. This is because during times of market turmoil, emotions can run high, and any impulsive decisions can lead to even more substantial losses.

Therefore, my approach during any stock market crash will be to remain patient and disciplined by avoiding knee-jerk reactions.

In so doing, I’ll also be allowing time for the power of compound returns to take effect. This process is key to building substantial wealth over the long term.

So, irrespective of whether the market crashes or rallies, I’d continue reinvesting the dividends or profits I earn from my portfolio back into those same shares. After all, the longer my money is invested and given time to compound, the more I will benefit.

Capitalising on opportunities

Finally, I think it’s helpful to see a market crash as a chance to purchase high-quality stocks at significant discounts. In any case, every bear market has eventually given way to a bull market.

During market crashes, the often indiscriminate selling can lead to excellent companies being seriously undervalued. Therefore, by focusing on fundamentally strong companies with a competitive advantage, robust balance sheets, and loyal consumer bases, I can position myself to capitalise on the inevitable market recovery.

All things considered then, I don’t see any reason to fear the stock market crashing in 2024. By building a resilient portfolio, embracing the long-term perspective, and capitalising on good opportunities, I can put myself in a strong position for the long term, regardless of whether share prices rise or fall.

The post How I plan to navigate the 2024 stock market crash appeared first on The Motley Fool UK.

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• Buying £20k of Lloyds shares could give me an £851 income this year!

Matthew Dumigan 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.

In recent weeks, gold prices have rallied sharply. The increase in demand for safe-haven assets amid the breakout of the conflict in the Middle East has caused the rise.

In light of the geopolitical and market uncertainty, would I be wise to turn my back on cheap UK shares in favour of investing in assets such as gold? Let’s take a closer look.

The place for gold in a diversified portfolio

Investors traditionally consider gold as a safe-haven asset. This is particularly evident during times of economic uncertainty, geopolitical instability, or market volatility.

During such times, investors often flock to gold as a store of value when other assets (including stocks) may be depreciating.

In addition, gold has historically acted as a hedge against inflation. During times of high inflation, the value of paper currency usually decreases, but gold tends to retain its value. This makes it an attractive option for investors looking to preserve purchasing power.

With all of that in mind, I think there could definitely be a place for gold as part of a well-diversified investment portfolio. But when it comes to long-term wealth building, I remain convinced that buying undervalued UK shares represents a superior strategy.

Focusing on cheap UK shares as a long-term strategy

Investing in stocks offers the dual prospect of steady income as well as capital appreciation. For instance, unlike gold, many British stocks offer the potential for regular income by way of dividends. And that’s why the majority of my portfolio would continue to be allocated towards UK shares.

Reinvesting these dividends over time would enable me to harness the power of compound interest. This is the process that can exponentially grow a small initial investment into a huge amount in the long run.

Within the FTSE 100 there are well-established companies with a history of stable earnings and regular shareholder payouts. What’s more, a handful of them look dirt-cheap in my eyes.

For example, UK-based financial services provider Legal & General is currently trading with a price-to-earnings ratio of 5.4. This suggests to me that the market could be seriously undervaluing its shares.

However, it’s important for me to note that targeting cheap stocks comes with its own set of risks. After all, market sentiment and economic factors can change swiftly, potentially affecting both share prices and dividend payments unexpectedly. To illustrate, during the coronavirus pandemic, a number of companies were forced to suspend shareholder payouts amid the financial pressure.

The final verdict

That said, over the long term, the stock market has exhibited consistent growth. Moreover, history tells us that despite the short-term volatility, markets tend to recover and appreciate over extended periods, providing substantial returns on investments.

All things considered then, while gold undeniably has its merits, the potential for long-term capital appreciation and income generation that comes from UK shares explains why I’d focus primarily on investing in stocks in my pursuit to build substantial wealth over time.

The post Forget investing in gold, I’d keep on buying cheap shares to build wealth over time appeared first on The Motley Fool UK.

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Matthew Dumigan 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.

According to the analysts at Fidelity, UK shares have been getting cheaper and cheaper relative to rival markets in the US and Europe for several years.

A quick glance at some commonly used valuation measures backs up this statement emphatically. For example, analysis from Schroders shows that back in 2015, the price-to-earnings multiple for the UK stock market was less than 10% below that of both the US and Europe. That has now fallen to over 20% below Europe and more than 40% below the US.

The way I see it, there are two possible explanations. Either the attractive yields and current affordability of UK dividend shares represent a golden opportunity for investors seeking a reliable passive income stream, or British stocks are cheap for a reason because of doubts in relation to whether companies can deliver earnings and recover their valuations.

Let’s begin by exploring the possibility of the latter.

Not all cheap stocks are good investments

In the world of investing, a value trap occurs when a stock appears undervalued according to traditional financial metrics.

As a result, investors see these low prices and become convinced that they’ve found a great deal. However, the low share price may be due to fundamental issues within the company. These could include declining sales, high debt, management problems, or even an outdated business model.

Thinking about value traps serves as a useful reminder to me that not all cheap stocks are good investments. But what about cheap UK dividend stocks?

Well, for this to be true in the context of the British stock market, I think the relatively low valuations would have to be attributed to one or more of the following factors: underlying fundamental problems within the companies, economic factors such as a recession or economic instability, or negative market sentiment. In my view, only one of those applies in the case of the UK stock market.

Negative market sentiment creating opportunities

Across the FTSE 350, I see a wide range of high-quality companies with strong fundamentals and exciting growth prospects. And relative to other countries in Europe and North America, I don’t think the UK is battling with any more serious economic woes than its peers. That leaves me with just one explanation: market sentiment and perception.

Morgan Stanley analyst Graham Secker points out that UK equities have a long-standing reputation for being reasonably valued, but that persistent negative investor sentiment about the overall UK economic conditions over the last 5-10 years has arguably made them even more affordable than usual.

Even if companies are fundamentally strong, negative market sentiment about a particular country can keep share prices depressed. And that’s exactly what I believe we’re observing in the UK stock market.

Building a stable passive income stream

Consequently, I reckon investor sentiment towards British stocks is due an improvement. And if it comes, cheap dividend shares won’t stay cheap for long.

That’s why if I had any cash to spare, I’d load up on undervalued income stocks while I still had the opportunity. Doing so could position me well to benefit from a reliable and substantial passive income stream further down the line.

The post Are cheap UK dividend shares a once-in-a-decade passive income opportunity? appeared first on The Motley Fool UK.

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Matthew Dumigan 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.