In my life in the City, I sometimes heard traders say they had no time for dividend stocks: they were only interested in the speculative punts, the “double or quits” penny shares. A couple of them made it big, but most lost their shirts.

There is no need to take big risks on the stock market. An investor can make serious money by investing in a handful of very good stocks that steadily increase in value over time and pay out large dividends without fail.  

Indeed, this is the Warren Buffett way. It’s tried and tested.

Dividend stocks yielding 7% are my target

£1,000 in cash receiving 7% interest a year would double to £2,000 in 10 years. This sounds good, but even with interest rates on the rise, depositors are lucky to get 1.5% interest on cash in the bank at the moment.

However, there are some high-paying FTSE 100 dividend stocks yielding 7% or more that potentially offer excellent returns. It’s these that I am targeting.

This is because if these companies are also increasing their profits year on year then it’s likely the dividend and share price will increase, too. This is the perfect combination!

My initial £1,000 would then grow at a higher rate than the 7% and I would double my money long before 10 years are up.

Compounding

But there’s more. If you reinvest the dividends in additional shares in the same company, which then continue to grow, then you make even more money. This is compounding. Again, Warren Buffett swears by this.

I have been doing it with Legal & General sharesfor example, which I initially bought after the market crashed in 2020 due to the Covid-19 outbreak. The shares have been a lucrative investment.

Furthermore, some companies make so much cash they dish out “special dividends”, i.e an additional payout. I will often reinvest those in the same company, too.

I am considering buying more shares in Barratt Developments, which has a dividend yield of nearly 7% and £1.1bn in cash on its balance sheet. Some analysts have predicted this cash could be paid out as a special dividend.

A risk with the high dividend-yielding housebuilding stocks is that higher interest rates and the cost-of-living crisis eventually deter prospective house buyers.

However, there is a shortage of new homes and demand is still high in the UK. These stocks are worth watching for buying opportunities on share price dips.

A notorious pitfall

One risk to the high dividend strategy is being drawn into what’s called a “value trap”. These are shares that offer a high dividend and look enticing, but the company has basically stopped growing. The dividend never increases and sometimes gets cut. The share price then falls. You lose money.

Vodafone is one example of this over the last few years, and fortunately it is the only mistake I have made with this strategy. One learns by experience.

Sometimes a takeover or good merger can get an investor out of a hole, however, and I will see what transpires with Vodafone.

The post How I’m using big-payout dividend stocks to target early retirement appeared first on The Motley Fool UK.

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• No savings at 45? Here’s how investors could still build a £17,360 second income
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Michael Wood-Wilson owns shares in Legal & General, Barratt Developments and Vodafone. The Motley Fool UK has recommended Vodafone. 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 am learning from experience and from listening to others, such as the legendary Sage of Omaha, Warren Buffett.

Buffett once said “Someone’s sitting in the shade today because someone planted a tree a long time ago. The biggest mistake is not learning the habit of saving properly.”

He is now worth $100bn. On this basis, I am not going to make the mistake of frittering away my spare cash which he refers to.

£90 a week may not sound like much but in 11 years it would be worth over £50,000, even with no growth at all. Furthermore, if invested in a relatively safe FTSE 100 stock that had a dividend yield of 7%, it would give me £3,500 a year in income.

This income would be tax-free if held in a Stocks and Shares ISA. That sum would pay a good chunk of my annual bills for life, unless the cost-of-living crisis gets even worse!

But most exciting of all is that if invested in a good stock that grows steadily year on year, increasing its dividend along the way, then the £90 a week could create a portfolio worth nearer £100,000 after 11 years.

Therefore the £3,500 from a £50,000 portfolio would be £7,000 tax-free from £100,000. This is not to be sniffed at, especially if invested for an even longer duration.

The thing to remember is that a stock that may look expensive now might look to have been cheap in 11 years’ time. For example I have owned AstraZeneca shares since 2011, 11 years ago, when they were priced at £30 a share. At the time I thought maybe £30 was expensive, but the company continued to do well and grow and are now valued at £108 a share.

With hindsight, they were very cheap indeed and had doubled in value long before Covid-19 came on the scene. I now just wish I had bought more shares, but that’s hindsight for you! The dividends and capital growth have been phenomenal.

What I need to do is find more AstraZenecas. There are probably plenty of them staring me in the face in the FTSE 100 index, and diligent analysis and then buying at the right price is key to success.

The FTSE 100 is looking cheap compared to other major indices around the world. It has a lower price-to-earnings (P/E) ratio than the Dow Jones, S&P 500 and Nasdaq for example.  

Okay, this is partly justified as the USA has some truly exceptional success stories listed on its stock markets, such as Amazon, Alphabet (which is the holding company for Google) and Apple, and the Federal Reserve is being tougher on inflation than the Bank of England. But overall, UK shares are looking attractive.

The FTSE 100 sectors I particularly like the look of are Aerospace & Defence, Insurance/Investment Services, Energy, Tobacco, Pharmaceuticals and Banking. I believe there are a few gems in here that could offer the solid long-term growth I’m looking for.

The post Investing just £90 a week in cheap UK shares could set me up for life appeared first on The Motley Fool UK.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Michael Wood-Wilson owns AstraZeneca shares. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and 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.

I already hold some of the company’s shares in my Stocks and Shares ISA and am considering buying more.

A strong takeover candidate

In January this year, Unilever bid £50bn for what is now Haleon when it was still part of GSK. Haleon’s current market valuation is just £28bn. I believe this to be an anomaly and that several companies and private equity buyers will be running their slide rule over Haleon. Unilever is probably still one of them. Reckitt has been touted as another potential domestic bidder.

The more the British pound weakens against the US dollar, the cheaper a takeover becomes for an American buyer. For example, American giant Johnson and Johnson, valued at £375bn, could snap up Haleon without blinking.

Fending off a bid now that Haleon is separately listed would be a lot harder for the company than when it was still part of GSK.

The logic of a takeover is that greater size enables a company to lower its costs, widen its margins and increase its profits.

Haleon’s product portfolio offers huge potential to a buyer, especially in the growth markets of India and China.

Haleon’s latest trading report

Haleon released a strong trading update for the first six months of 2022 this week, which showed that revenues increased 13.4% and e-commerce sales increased in the “high teens”. This is well ahead of inflation and indicates that Haleon can raise its prices without impacting on performance.

Sales were quite evenly spread across the globe, which provides an element of safety to the business and my investment in it. If one region faces a downturn, another can often compensate with higher sales.

At the time of Unilever’s takeover bid in January, GSK’s CEO Emma Walmsley insisted Haleon would have a brighter future on its own. Based on this trading report, perhaps this is true, in which case it’s another reason why the shares look cheap and are a long-term hold for me.

Unilever also reported strong trading this week, which gives it more firepower for acquisitions.

Potential risk

Haleon has £10bn of debt, but analysts believe this to be manageable for such a reliable business. It would probably affect the price a bidder would pay, however.

Watchlist

I am watching the Haleon share price and market valuation closely. If the company’s value falls to £25bn, i.e half the £50bn Unilever bid for it in January, then I will buy more shares as I could double my money from a takeover at the same price. I believe a takeover could happen within three years.

With the shares held in my Stocks and Shares ISA, any capital gain would be tax-free. I am definitely holding onto the Haleon shares I already own in the hope of “all good things come to those who wait”, as the saying goes. However, I’m fully aware there is always the possibility that a bid does not materialise, but there’s still a place for it in my long-term portfolio regardless!

The post Should I buy Haleon shares to double my money, tax-free? appeared first on The Motley Fool UK.

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Michael Wood-Wilson owns shares in Haleon. The Motley Fool UK has recommended GSK. 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.

GSK (LSE:GSK) shares have held up well in this year’s market turmoil. Furthermore, on 18 July the company demerged its consumer healthcare business so is now purely a pharmaceutical company.

This is important news for investors like me. It changes the way the company is viewed by potential stock market predators in the pharmaceutical sector, and I am always on the lookout for the next likely takeover candidate. Additionally, any capital gain within my Stocks and Shares ISA is tax-free.

Takeover appeal

Before the demerger, GSK was a large mouthful for a possible predator such as Pfizer to swallow. But now GSK is a bitesize treat, with a stock market valuation of just £71bn compared to Pfizer’s £240bn and the even bigger Johnson & Johnson’s £377bn. If the British pound continues to weaken against the US dollar then a takeover would become even more appealing for a buyer.

For a takeover to succeed, the purchase price would likely be far in excess of GSK’s current valuation. Additionally, takeovers and profitable mergers have clearly had a long history in the pharmaceutical industry, e.g. AstraZeneca (Astra and Zeneca), and Glaxo and SmithKline. These giants often grow this way. It may or may not happen, of course, but I feel there is more upside potential than downside to purchasing the shares.

Long-term positives

If a takeover doesn’t transpire then I think the future should still be quite bright for GSK. It hasn’t got much debt as it parcelled this off when demerging the consumer healthcare company (which is now named Haleon). Debt is a hindrance to a company, especially in a time of rising interest rates around the world, but GSK has the capacity to invest heavily in research and development for ongoing success.  

GSK is very nicely placed in the field of vaccines, catering for a growing global population. After two years of a Covid-19 pandemic, most world leaders have grasped the importance of having a vaccine that works, and of holding plentiful supplies of it.

GSK’s pharma business is also strong. The company anticipates underlying operating profits to grow at circa 10% per annum.

We’re in a cost-of-living crisis with high inflation across the globe. Some companies will flounder in this environment, since if they raise their products’ prices, their customers may not be able to afford them or just choose not to buy them. But medicines and vaccines are almost an essential purchase, and GSK will likely be able to raise its prices in line with inflation and remain profitable.

Also, in a time of volatility caused by war, pharma is a good defensive sector of the stock market to be invested in.

GSK shares’ negatives

Post demerger, the company’s dividend will be lower than in previous years, so if income had been a priority for me, then there are better options than GSK.

New drugs could fail during trials, and existing patent protections on GSK’s products will eventually expire, which means GSK’s competitors can launch generic versions of its best-selling drugs. So the company has to keep discovering new drugs and manufacturing successful vaccines to prosper.

On balance, however, I am a fan of GSK and have invested in it for the long term.

The post Why I’ve just bought GSK shares for my Stocks and Shares ISA appeared first on The Motley Fool UK.

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Michael Wood-Wilson owns GSK shares. The Motley Fool UK has recommended GlaxoSmithKline. 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 FTSE 100 has been hovering around the 7,100 mark this week after falling from 7,600 earlier in June. This 500-points decline has left the stock market looking good value to an investor like me as it’s potentially a cheaper entry point for my long-term ‘buy and hold’ strategy. But I still need to be cautious as appearances can be deceptive.

Long-term gain

One of legendary investor Warren Buffett’s most famous quotes is “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”. The reasoning behind this is that it takes time for a company to grow and bring its share price (and perhaps dividend) up with it. Although it would be nice to ‘get rich quick’, hardly anyone does. The biggest gains are usually made over many years.

Another reason for buying and holding long term is that I reduce my trading costs. Day traders pay out a fortune to their stockbrokers from all that dipping in and out of the market, and an estimated 80% of them lose money. I will also receive the dividends they miss out on. As my investment timeline stretches years into the future I am not too worried about the stock market correction that’s happening now.

Timing

But there’s something else I need to consider before buying. Good timing of a purchase can be just as important as holding shares for a long-term gain — the two should always go together. I’m often wary of buying shares at their all-time high share price as, more often than not, the price will fall and I’ll kick myself for not being more patient and waiting for the opportunity of snapping them up cheaply. So with the FTSE 100 almost 5% lower than a month ago, I am now more confident that I’m buying shares at sensible values. 

Buying shares with potential

Buying the right stock is also key to making money on my investment during market volatility. By this, I mean a company that the market usually rates highly and which has fallen in value primarily due to the market correction rather than something specific to the company causing it to fall.

It’s no good buying a stock that looks cheap, only for it to fall another 30% and take far longer to recover in the long term than other stocks. For example, well-regarded Legal and General shares appear to have merely fallen with the market as the company hasn’t released any trading statements or news recently, whereas easyJet shares have fallen with the market AND fallen further because of negative news specific to the company, such as flight cancellations and delays. Some investors might argue that this makes easyJet shares even more of a buy, as after its steeper fall, its recovery could be greater. But I’ll leave that for another article!

So, bearing the above in mind, on balance I am considering making some purchases. The old adage “buy low, sell high” is the ideal I aim for.

The risk to buying now is that the stock market may have further to fall, i.e. “don’t try to catch a falling knife”. However, recent interest rate rises appear to have stabilised markets.

The post Shares look cheap but should I invest in the stock market now? appeared first on The Motley Fool UK.

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Michael Wood-Wilson owns shares in Legal and General. 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.

A prime example of the benefit of regular long-term investment is the FTSE 100 index. Launched in January 1984 with a starting value of 1,000 points, the FTSE 100 is currently hovering around and above 7,000. Plenty of us will benefit from this sevenfold FTSE 100 increase in retirement as pension funds have always been heavily invested in its blue-chip shares. But I’m looking at an additional £10,000 passive income on top of a state, or private, pension.

An expanding profitable company will usually increase its dividend over time and, in normal market conditions, see its share price increase too. I also plan to reinvest dividends in new shares to help keep the growth going over the period. So I feel it’s not unreasonable to expect my invested £120,000 to increase in value to at least £200,000 over 20 years, and if this sum has a 5% dividend yield then it could provide me with the targeted £10,000 passive income per annum.

I have already bought two of the following stocks and will likely buy all three:

Legal and General

Okay, a life insurer and pensions specialist doesn’t sound exciting, but when I want excitement I might buy a penny-share mining stock. And in the long term, the odds are in favour of Legal and General outperforming the speculative stocks and rewarding me with a capital gain and high income. The company has three major positives in its favour as a solid long-term investment:

• It provides products that are particularly suited to the UK’s growing population, which has a longer life expectancy than ever before;
• It pays a big dividend – the yield is 7%;
• The dividend usually increases year by year.

I think things look good for this company and I have bought some shares.

Diageo

This global drinks giant is continually expanding into new markets and increasing its revenues and market share. It owns established brands such as Guinness, Johnnie Walker and Gordon’s.

Diageo’s dividend continues to increase year by year. This is a high-quality stock and I am considering buying some shares.

Aviva

Life insurer Aviva has similar advantages to Legal and General, with a high dividend yield and an aging and growing population to tailor its products for. An additional potential bonus is that I think both of them have a better-than-average chance of being taken over. The British pound is very weak against the US dollar, and a large American company could snap these two up in a jiffy. The proceeds could then be invested in similar long-term buys in pursuit of my goal.

Of course, there is the risk that a high-quality stock can become a plodder or worse but, over 20 years, history shows us that the stock market rewards sensible long-term investment.

The post How I’d invest £500 a month to achieve a £10,000 passive income per annum appeared first on The Motley Fool UK.

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Michael Wood-Wilson owns shares in Legal and General and Aviva. 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.

The last time UK inflation hit 9% was over 40 years ago in 1981. Inflation places us investors in a difficult position. I’m receiving almost zero interest on money held in the bank, which means this year my spending power will reduce by that 9% inflation rate. This is a shocking devaluation of savings. So how can I fight back? By investing sensibly in my Stocks and Shares ISA, where all gains and income held in the ISA are also tax-free.

The following three stock market investment sectors and their associated companies have historically been a good way to keep pace with inflation, i.e. for share price increases plus dividend income, resulting in my ISA’s total value increasing by at least the 9% inflation rate this year.

Pharmaceuticals

When there’s a cost-of-living crisis, people become more picky about what they spend their money on, myself included. But healthcare is always near the top of the list of spending priorities, and pharmaceutical companies can raise their prices in line with inflation, knowing their customers will probably still buy their products. Personally, I get hay fever at this time of year, and if I had a choice of buying a good quality nasal spray or going to a pizza restaurant but continue suffering from hay fever, I would buy the spray and ditch the pizza. The restaurant loses out, but not the pharmaceutical company that makes the spray and the chemist that sells it.

Partly for this reason I have bought AstraZeneca shares plus that other pharma heavyweight, GlaxoSmithKline, and they are long-term holds for my Stocks and Shares ISA. AstraZeneca also has a dividend yield of 2.1% and GlaxoSmithKline yields 4.6%.

Oil

A rising oil price is a major cause of inflation, so of course it usually keeps pace with the inflation rate. Indeed, the oil price has almost doubled in the last year. For this reason, oil explorers and refiners BP and Shell are currently making huge profits. Okay, there is some political risk with a windfall tax on “excess profits”, but recent government measures in this respect are more than offset by the amount of cash the companies are making.  

I have bought BP shares and am considering buying Shell stock, too. And for dividends, BP yields 3.75% and Shell 2.91%.

Tobacco

We all know how much smokers like their ciggies and vaping products. Even now when money’s tight, recent results from Big Tobacco companies like Imperial Brands and British American Tobacco showed sales and profits holding up nicely. And the dividend yields are high, at 7.8% for Imperial Brands and 6.2% for British American Tobacco. I have bought shares in the former and am also considering buying some of the latter’s.

I believe the above companies are excellent hedges against inflation for my Stocks and Shares ISA. However, please bear in mind the old adage that the past is no guide to the future and the above shares are also impacted by many other factors unrelated to inflation, so their price could fall.

The post Inflation is attacking my Stocks and Share ISA. Here’s how I protect it appeared first on The Motley Fool UK.

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• £5,000 invested in Greggs shares in October 2024 is now worth…
• Where will Rolls-Royce shares go next? Let’s ask the experts
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• How to invest £10,000 to aim for a £6,108 annual passive income

Michael Wood-Wilson has shares in AstraZeneca, GlaxoSmithKline, Imperial Brands and BP. The Motley Fool UK has recommended British American Tobacco, GlaxoSmithKline, and Imperial Brands. 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.

Rolls-Royce (LSE:RR) shares are currently generating a lot of interest for private investors, myself included, primarily because they are now a penny stock and everyone likes a potential bargain, but also because a positive investment case can be made for the company. With the shares having crashed since the onset of the Covid-19 pandemic in 2020 to just 90p today, I am considering whether Rolls-Royce shares are a buy for my Stocks and Shares ISA, but there’s a lot to consider!

[fool_stock_chart_ticker=LSE:RR]

It’s important to point out that although Rolls-Royce’s share price being below 100p technically qualifies it as a penny stock, historically the term “penny share” has been applied to market tiddlers, the smaller companies valued at under £100m that, for example, during the dotcom boom one could buy for 5p a share and sell a week later for 20p on a scrap of good news. But Rolls-Royce has a market capitalisation of £7.6bn, with over eight billion shares in issue. It’s no tiddler, it’s a monster, even at these low share price levels, and it’s highly unlikely to multiply in value in a hurry. So I am not excited by the somewhat speculative market chatter surrounding its penny share status.

However, I do like its investment case, or story. The reason for Rolls-Royce’s share price fall is primarily because its business depends so much on aviation, and aviation came to a standstill during the pandemic. But the pent-up demand for air travel is immense. We’ve seen the recent queues of holidaymakers at airports, the supply chain issues for businesses caused by seaports not functioning efficiently, the emerging middle classes in India and China that have money to spend on seeing the world. Unfortunately, in addition to ongoing pandemic travel restrictions overseas, there is now the Russia/Ukraine war, a cost-of-living crisis and high oil prices to contend with, which is not conducive to Rolls Royce’s customers placing new orders for aircraft engines and lucrative service agreements.

So while I feel the story is good, it’s just not quite here yet. It’s mid-term. But the stock market looks ahead too, and Rolls’ share price stabilised a month ago at 78p and has risen approximately 15% since.

There are also more strings to the company’s bow in its Defence, Power Systems and New Markets divisions. Indeed, at the AGM last month, chairman Warren East said: “We are confident that we have positioned the business to achieve positive profit and cash this year, driven by the benefits of our cost reductions and increased engine flying hours in Civil Aerospace together with a strong performance in Defence and Power Systems”.

The Defence business is particularly lucrative, and the electric planes being developed by the New Markets division could be a future game changer.

The downsides are that there is no dividend, high debt (but this is expected to be reduced by £2bn with the sale of ITP Aero this Summer) and, unsurprisingly, low profits. The £7.6bn stock market valuation is not cheap by any means, considering these downsides.

A recovery in global aviation is key for Rolls-Royce and, despite some more turbulence, I think the company could do well in the next few years. I am considering buying shares for my Stocks and Shares ISA in anticipation of this.

The post Are Rolls-Royce shares a buy for my Stocks and Shares ISA? appeared first on The Motley Fool UK.

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Michael Wood-Wilson 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.

I’m nervous. I am one of those shareholders, and believe there is a risk to the company that is totally outside its control but that should be considered as a worst-case scenario. Russia was the elephant in the room that too many investors ignored a few months ago, and China may be another one now.

On 30 May, 30 Chinese military aircraft flew into Taiwan’s Air Defense Identification Zone. In response, Taiwan scrambled its own planes and positioned air defence missile systems in readiness for an attack. Fortunately the Chinese planes departed without firing a shot, but China has almost doubled the amount of these incursions this year compared to 2021.

China’s President Xi Jinping has stated he wants to see “reunification” with Taiwan. If China did invade, then sanctions would almost certainly follow. Furthermore, US President Biden said the US would defend Taiwan militarily if it invaded. It would be carnage, due to China’s pivotal position in the global economy. Military and stock market carnage.

If sanctions were to prohibit companies from operating in China then it would be catastrophic for HSBC, immediately impacting on operations in its most lucrative market and jeopardising its capital buffers and liquidity. Just imagine it, The Hong Kong and Shanghai Banking Corporation Limited, commonly known as HSBC, being unable to operate in China…

However, there are those that believe HSBC is so integral to global financial liquidity that it would have to be exempted from punitive action against China. Remember in the 2008 financial crisis when other banks were going bust or being bailed out, HSBC was considered “too big to fail”, as if it did fail it would bring many more banks and financial institutions down with it. The stock market appears to be giving HSBC the benefit of the doubt for this reason, perhaps, and with its share price of 520p recovering nicely from its low point in the last year of 358p, investors also appear to believe there will not be another war.

Nevertheless, I am considering selling approximately 20% of my HSBC shares as a precaution, and am watching the situation closely in case I need to sell more — although if an invasion were to occur when the stock market is closed, I would be too late…

People thought President Putin’s army would not invade Ukraine despite their military manoeuvres, but they invaded. Let’s hope China’s military manoeuvres do not presage another invasion.

The post My HSBC shares could tank if China invades Taiwan appeared first on The Motley Fool UK.

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Michael Wood-Wilson has shares in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. 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.

London-listed FTSE 100 stock Imperial Brands (LSE:IMB) manufactures and sells a wide range of established tobacco products, such as John Player Special and Rizla. It is also expanding in the growing market of Next Generation Products (NGP), such as vaping devices. In 2022, tobacco is proving to be as defensive a sector as they come.

During the market carnage of the last three months Imperial Brands’ share price has actually increased from £15 to £18 a share, indicating that investors feel in a time of war, Covid-19, interest rate rises, potential recession and a cost of living crisis, that the company’s customers will continue to purchase their ciggies.

Half-year revenues reflect this, increasing 0.3% to £3.5bn overall, with NGP growing by 8.7%. Underlying profits rose 2.9% to £1.6bn.

The company has greater scope to raise its prices in the current high inflation environment than the sellers of big ticket items like vehicles and electronic goods, as the financial outlay for tobacco products is so much smaller.

Furthermore, the shares currently yield 7.7%, which is a nice bonus to the rising share price. Interest rates may be increasing globally but you’d still be lucky to get 1.5% interest on your cash.

Another factor that arguably provides a safety net for the share price is that Imperial Brands is one of the smaller global tobacco companies and considered a potential takeover candidate for its larger competitors to snap up. With the British pound very weak against the US dollar it would make more sense to a major American player like Philip Morris International to buy it than it would have done historically. However, it should be noted that takeover speculation frequently does not end in a bid, and competition regulators would likely be involved in the process if one transpired.

Some financial institutions are prohibited from purchasing tobacco shares as tobacco can impact negatively on people’s health and this is one reason for the low price-to-earnings (P/E) ratio of just 7.

A potential risk to Imperial Brands shares is a proposed ban on menthol cigarettes in the USA, but a study in Canada found that after these products were banned there, at least 80% of menthol smokers just moved onto other tobacco products and plenty more managed to obtain menthol cigarettes from elsewhere. However Imperial Brands’ share price would likely be impacted if the ban goes ahead.

The shares went ex-dividend on 26^th May 2022 but I am considering buying more for my portfolio due to the high dividend income, a stable share price in volatile markets, growth in the exciting NGP field and the spice of a potential takeover.

As Warren Buffett said, “The first rule of an investment is not to lose money. And the second rule of an investment is don’t forget the first rule.”

The post Imperial Brands shares are smoking hot appeared first on The Motley Fool UK.

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Michael Wood-Wilson has shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.