The recent stock market rally could cause investors to consider whether a crash is now imminent. However, such events can be very difficult to predict.

As such, a strategy that aims to buy undervalued shares for the long run when they’re available could be a logical approach. It may allow for strong growth in the long run. It may also allow for some relative protection from a potential market crash.

Predicting if a stock market bubble will burst

Despite the recent stock market rally, identifying a stock market bubble that’s ready to bust can be a challenging task. After all, there appear to be some companies that continue to trade at low prices even after the recent recovery.

For example, sectors such as financial services, retail and resources could contain companies that have low valuations as a result of weak investor sentiment and an uncertain economic outlook. This could mean there are still buying opportunities on offer.

Furthermore, the stock market’s performance is very difficult to accurately predict. Certainly, it has a long track record of delivering high single-digit annual total returns. However, those returns are very unlikely to be linear.

They include periods of growth and decline that themselves are dependent on a wide spectrum of factors that are tough to forecast on a consistent basis. This could mean a stock market bubble increases in size, or bursts, in future.

A logical approach after a stock market rally

Given the difficulties in predicting whether a stock market bubble will burst or not, it may be prudent to instead focus on purchasing undervalued shares. They may offer a combination of low prices and high-quality fundamentals. Such as strong balance sheets and resilient cash flow.

Not only may they be less impacted by a stock market crash because they are priced at low levels, they could outperform their sector peers in a bull market or bear market.

For example, a high-quality business with a wide economic moat may have more resilient sales in a downturn. Equally, it may be able to generate higher margins and profit growth that’s reflected in a faster-rising share price during a period of stock market gains.

A long-term view

Clearly, no company is guaranteed to escape the bursting of a stock market bubble. Falling share prices can lead to deteriorating investor sentiment that pulls down even the most attractive stocks.

However, stronger businesses purchased at appealing prices can be a sound means of generating impressive total returns. When held for the long run, they could offer relatively strong performance compared to sector peers and the wider stock market.

The post Stock market rally: is the bubble set to burst? appeared first on The Motley Fool UK.

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Buying companies that have affordable dividend payouts as a proportion of profit could indicate they have scope to raise shareholder payments. Similarly, stocks with impressive profit forecasts may be able to raise their dividends at a relatively fast pace.

Through buying a diverse range of such companies, it could be possible to build a strong income portfolio in a low interest rate environment.

Buying shares with low dividend payout ratios

A company’s dividend payout ratio can provide guidance on its passive income prospects. The ratio is calculated by dividing dividends paid in the most recent financial year by net profit from the same year. The result is a percentage figure. A figure below 100% shows the company had headroom when making its most recent dividend payments out of net profit.

Clearly, company profitability can change. Especially in the current economic environment. However, businesses with low payout ratios may find it easier to grow their dividends at a fast pace than those companies that have higher payout ratios.

They may be less reliant on rising profits to fund dividend growth. As such, they could be a more promising means of obtaining a rising passive income in the coming years.

Earnings growth can catalyse a company’s passive income

Companies that have attractive earnings growth prospects may also offer a higher chance of providing a rising passive income. For example, two companies with the same payout ratios may have very different financial outlooks due to industry conditions and their strategies.

The stock with a more upbeat operating outlook may find it easier to raise dividends without compromising the affordability of its shareholder payouts.

Of course, assessing the profit potential of any business is a known unknown. It’s especially difficult at the present time to judge whether a company has scope to raise profitability. However, by focusing on the track record of profit growth for a specific stock versus its peers, it may be possible to deduce whether it has a competitive advantage.

This may indicate that it’s able to offer more resilient sales growth, higher margins and a rising passive income in the long run.

Buying dividend shares today

The uncertain economic outlook makes it more important than ever to diversify among a range of dividend shares when seeking to make a passive income. Otherwise, an investor may be too reliant on a small number of holdings for their income.

Even after the stock market’s rally since the 2020 stock market crash, a number of companies appear to be trading on low valuations. Certainly given their long-term dividend prospects. As such, there seem to be opportunities to build a diverse income portfolio. One that can provide strong growth in a low interest rate environment.

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Even after the recent stock market rally, there could be opportunities to buy undervalued stocks. They may offer greater scope for capital growth in a stock market rise. As well as a more stable performance should there be another stock market crash.

Warren Buffett’s focus on undervalued shares

As a value investor, Buffett has always sought to buy undervalued shares. This doesn’t necessarily mean that he purchases companies trading at cheap prices. Instead, he aims to buy a high-quality business for less than he believes it’s worth. Sometimes, this can mean paying a higher price than sector peers are currently trading at.

However, should the company in question have attributes such as a wide economic moat, Buffett has often purchased it in the past.

The result of this strategy has been very successful for Buffett. He’s outperformed the wider stock market over a period of many years. Following a similar strategy could be worthwhile, since it may allow an investor to generate relatively high returns. After all, a stock that’s priced for less than it’s worth may be able to deliver stronger capital gains versus fairly-priced or overpriced shares.

The potential for a stock market crash

Warren Buffett’s strategy of buying undervalued shares could also be appealing due to the potential for a stock market crash. Predicting when this will occur may be challenging. However, through buying companies that don’t trade on excessively high valuations, it may be possible to outperform the wider market in a downturn.

Clearly, this doesn’t mean that losses will be avoided. After all, no stock is guaranteed to produce positive returns over any time period – even if it seems to be undervalued when bought. However, it can mean an investor’s portfolio which is focused on undervalued shares is less negatively impacted by weak investor sentiment and falling stock prices.

Such companies may already trade at discounts to their intrinsic values, while overpriced shares decline to their real worth.

Opportunities to buy undervalued shares today

There may be opportunities to follow Buffett’s strategy in today’s stock market. A number of stocks and sectors are yet to fully recover from the 2020 stock market crash.

Certainly, some industries are trading at high prices and global stock markets have hit record highs of late. However, sectors such as retail and consumer goods could contain undervalued shares that represent buying opportunities. Through capitalising on these businesses, it may be possible to earn attractive total returns in the coming years.

The post I’d listen to Warren Buffett’s advice to buy undervalued shares today appeared first on The Motley Fool UK.

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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.

This approach may be especially useful in today’s stock market environment. The recent rally makes it easier to become overly confident in the prospects for equity markets. This may lead to poor decision-making.

Warren Buffett’s long-term focus

Many of Buffett’s major portfolio holdings have been present for decades, rather than years. In that time, they’ve often delivered strategy changes and capitalised on growth opportunities simply not possible to achieve in a matter of months.

Through allowing them the time they need to produce improving returns and higher profitability, Buffett’s been able to enjoy higher returns than may have been possible if he’d adopted a short time horizon.

This point is especially relevant right now. Many investors may have enjoyed strong returns from their portfolio holdings in recent months. The stock market has experienced a rally that’s pushed it to a new record high on a global basis.

While it may now be tempting to sell stocks that have produced strong returns, and to buy others in their place, providing them with the time they need to deliver on their strategies could be a more logical approach.

Buffett’s investment fundamentals

Of course, Warren Buffett’s value investing approach means that he’s likely to sell a stock if it becomes overpriced. Similarly, if there are other more attractive opportunities available then it can be worth offloading a stock to generate sufficient capital to take advantage of it. Therefore, a long-term approach may not always be the right move.

However, selling stocks because they’ve risen quickly in price over a short time period may not be a prudent move. It can lead to an investor missing out on future gains. Especially since global economic forecasts are generally positive at the present time. And, since the world economy has always recovered from its declines to post impressive turnarounds, there may be further opportunities for capital gains in the coming years.

A simple strategy

Clearly, Warren Buffett’s long-term approach may not prove to be the right one for every investor. As 2020 showed, a stock market crash can take place at any time and can wipe large profits from existing holdings.

However, through having a long-term viewpoint, it may be easier to spot potential mispricings among high-quality stocks. It may also provide greater scope to benefit from the impact of compounding in a likely period of long-term economic growth over the coming years.

As such, sticking with high-quality companies, even after potential recent gains, could be a shrewd move.

The post Why I’d follow this piece of Warren Buffett advice today appeared first on The Motley Fool UK.

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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.

Despite the recent stock market rally, it may still be possible to unearth under-the-radar pandemic bargains. After all, a number of companies and sectors continue to be unpopular among investors due to their uncertain outlooks.

Through focusing on the quality of companies and comparing their valuations to those of sector peers, it may be possible to find attractive investment opportunities. Over time, they could deliver impressive returns in a potential long-term stock market recovery.

Defining under-the-radar pandemic bargains

Of course, different investors will have differing views on which stocks can be classed as under-the-radar pandemic bargains. However, they could include those companies that have solid fundamentals. These include a sound balance sheet, but trade at low prices compared to their sector peers.

For example, a clothing retailer may currently be struggling to generate rising sales because of lockdown restrictions. Consumers may be avoiding spending on clothing because of a lack of opportunities for social interaction. This could mean a challenging financial outlook for the company in question.

However, if it has a solid financial position that means it can survive and a wide economic moat, it could deliver a significant improvement in profitability as the pandemic subsides.

Furthermore, investors may have factored in many of the challenges faced by such businesses. This could mean they currently offer wide margins of safety that make them under-the-radar pandemic bargains when purchased with a long-term view.

Searching for bargain stocks in unpopular sectors

Some sectors may be more likely to contain under-the-radar pandemic bargains than others. For example, the travel & leisure industry currently faces a very challenging outlook due in part to the impact of coronavirus. This may have caused many businesses to trade at low prices, since investor sentiment could be weak.

But where they have strong customer loyalty and sufficient liquidity to overcome present challenges, they could offer investment appeal. By comparing their current valuations to their historic averages, as well as to those of sector peers with similar business models, it may be possible to unearth the most attractive buying opportunities. While their share prices may remain unpopular for some time, they could offer strong recovery potential over the long run.

Building a portfolio

Clearly, under-the-radar pandemic bargains could experience further challenges in future. As well as the prospect of ongoing risks associated with coronavirus, they may struggle to adapt to a fast pace of change in the world economy. Therefore, it’s important to build a portfolio that contains a wide range of companies to reduce risk.

Through identifying sound businesses that may be undervalued by other investors, it may be possible to generate attractive long-term returns. Over time, this could have a positive impact on an investor’s portfolio performance as the world economy experiences a likely recovery from what has been an extremely challenging 12-month period.

The post How I’d aim to find stocks that are under-the-radar pandemic bargains appeared first on The Motley Fool UK.

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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.

Despite the recent stock market rally, buying shares to make a passive income could be a logical strategy. In many cases, they offer high dividend yields versus other assets. They may also be able to deliver dividend growth, as well as capital growth, as the world economy likely recovers from its present woes.

As such, now could be the right time to buy a diverse range of income shares and hold them over the long run.

A generous passive income from shares

Many shares now trade at significantly higher prices than they did following the 2020 market crash. However, a number of companies offer high yields relative to other assets. Certainly, a low interest rate environment makes this task easier for equities.

But some stocks have dividend yields at the present time that are higher than their historic averages. This suggests they could offer an attractive income stream over the long run.

Of course, there’s never any guarantee that a company will maintain recent dividend payouts in future. A whole host of challenges can crop up that causes them to reduce or even cancel shareholder payouts. However, by purchasing a wide range of dividend shares with high yields, it may be possible to build a resilient and generous passive income stream at the present time.

Dividend growth opportunities

As well as high yields, a number of shares could offer a growing passive income in the coming years. The world economy has always recovered from its declines to post positive growth in the past. Although the same outcome can never be assumed, the scale of monetary policy stimulus already announced suggests a return to growth is likely to be ahead.

Through buying companies with affordable dividends and the potential to deliver rising profitability in the coming years, it’s possible to obtain a growing income return. This may become increasingly important over time. Certainly since low interest rates and quantitative easing in some major economies could spark a period of higher inflation in the long run.

Capital growth opportunities

As well as the potential for a high and growing passive income, dividend shares could deliver capital growth in the coming years. They could experience high demand as a result of limited opportunities to make a worthwhile income in other mainstream assets. This may drive their prices higher.

Furthermore, a high yield can indicate that a stock offers good value for money and a wide margin of safety. Buying undervalued shares has been a relatively sound means of capitalising on the stock market’s long-term growth potential.

As such, now may be the right time to buy dividend shares, since they could produce higher total returns than the wider stock market over the long run.

The post Stock market rally: why I’d invest in shares to make a passive income appeared first on The Motley Fool UK.

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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, it may still be possible to unearth top stocks that offer a mix of competitive advantages, solid finances and low valuations. Such companies could offer favourable long-term growth opportunities relative to other businesses.

Searching for top shares where other investors are not looking

A good place to start when searching for top shares could be unpopular sectors. Other investors may have disregarded them based on a variety of factors. These include their uncertain prospects or a rapid pace of change that’s taking place. This may provide opportunities to buy high-quality companies when they’re trading at attractive prices.

Clearly, every investor will have their own version of what represents an attractive company. However, it could include those businesses that have solid financial positions. And the capacity to adapt to a changing economic outlook. Through looking for such businesses where other investors aren’t spending much time doing likewise, it may be possible to unearth the most appealing buying opportunities following the stock market rally.

For example, investors may not be especially upbeat about the prospect of finding top shares in sectors such as financial services or energy at the present time. They face difficult operating conditions that could lead to losses for investors in what remains a precarious economic environment. However, by identifying the strongest businesses within such sectors, it may be possible to find undervalued companies within them.

Comparing stocks to their peers

Once a potential buying opportunity has been found, it may be a good idea to make a comparison with sector peers. This can provide a guide as to whether it’s among the top shares to buy today.

For example, two companies operating in the same sector may have similar valuations. However, one business could have a wider economic moat, such as a unique product or strong brand, that reduces its overall risks. Similarly, two stocks could have wildly different valuations – even though they have similar cost bases and revenue drivers. This may mean there’s a mispricing opportunity that can be exploited.

Assessing a company’s quality

Clearly, the future is always a known unknown. Even top shares that offer a mix of low prices and solid financial prospects can underperform the market. They may even fail to deliver a positive return in the coming years.

However, by taking the time to analyse specific sectors that may be unpopular at present, it may be possible to obtain a relatively attractive risk/reward ratio. Over time, this may lead to attractive portfolio returns.

The post How I’d aim to find top shares to buy in March 2021 appeared first on The Motley Fool UK.

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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.

When seeking to make a passive income, many investors may naturally be drawn to the highest-yielding dividend shares. After all, they offer the greatest potential income return on a relative basis.

However, it could be prudent to check their dividend affordability before buying them. This doesn’t guarantee they’ll be able to make future dividend payouts, of course. But it can be a means of ruling out stocks that are clearly unable to afford their shareholder payouts.

Similarly, assessing the growth potential of a company’s dividend can be a sound move. It may allow an investor to obtain a growing passive income in the long run.

Assessing affordability when buying dividend shares

The affordability of shareholder payouts can be assessed in a couple of different ways. Dividend shares can be analysed by comparing their net profits with shareholder payouts. A company with a large amount of headroom when making dividend payments may be less likely to run into trouble when trying to pay them in future.

Meanwhile, an assessment of a company’s wider financial situation can provide an insight into the affordability of its dividends. For example, considering its debt levels and interest cover, in terms of how many times it could service debt out of operating profit, may build a picture of its financial strength. Similarly, companies that have a long and reliable track record of dividend payouts may be less likely to cut them in future.

All of these factors, when combined, can provide an insight into the reliability of dividend shares. It may lead an investor to avoid the highest yielding stocks in favour of more reliable opportunities that have lower yields.

Dividend growth opportunities

As well as a high and reliable yield, buying dividend shares that can grow shareholder payouts at a fast pace could be a shrewd move. They may be able to deliver a rising passive income over the long run. And that should have more of a positive impact on an investor’s financial situation. Certainly compared to a high initial yield that fails to grow at a fast pace over the coming years.

Assessing the prospect of dividend growth is very subjective. It’s closely tied to the financial performance of a business, in terms of how quickly its profitability can grow. Therefore, analysing its strategy, forecasts and competitive advantage could act as a guide, rather than a definitive answer, to the question of its dividend growth potential.

Despite the subjective nature of assessing the growth potential of dividend shares, the process can help an investor to avoid potentially unattractive stocks. This doesn’t mean a complete avoidance of companies that may struggle to raise dividends in the coming years. But it could improve an investor’s risk/reward ratio so they’re more likely to enjoy a high and growing passive income in the long run.

The post Do the highest-yielding dividend shares offer the best passive incomes? appeared first on The Motley Fool UK.

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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.

One of the key reasons for his success could be his focus on buying companies with wide economic moats. In fact, this is one of his key tenets of investing, and forms a large part of his investment strategy.

Through adopting a similar approach, it may be possible to reduce risk and generate high returns over the long run.

Warren Buffett’s focus on economic moats

When buying a company, Buffett has historically looked for businesses that have a competitive advantage over their peers. He terms this an ‘economic moat’.

This is clearly very subjective. One investor may have a different viewpoint than another on whether a specific company enjoys a competitive advantage over its peers. However, it often includes those companies which enjoy strong brand loyalty. That means their customer base is more likely to stick with their products.

Or, it could be a business which has a unique product that sets it apart from rivals. Similarly, a business with a lower cost base than its rivals may be able to generate higher profitability in the long run.

Of course, Buffett has many years of experience in identifying companies with wide economic moats. However, by comparing the financial performance of companies, their track records in a variety of operating conditions and contrasting their business models, an investor may gain an insight into whether they have a competitive advantage over peers.

Economic moats and risk/reward opportunities

Warren Buffett’s focus on economic moats could increase his return potential. For example, a business that has a loyal customer base may be able to charge higher prices for its goods. Similarly, lower costs or a unique product may equate to higher margins. Over time, they can allow a company to command a higher valuation and rising share price.

Meanwhile, companies with economic moats may also offer less risk than their peers. For example, they may enjoy more robust demand during periods of weaker operating conditions. This may help to support their bottom lines, and could make them more financially sound than their peers. This point may be especially relevant amid current economic difficulties that may persist beyond the short run.

Buying stocks with competitive advantages today

Due to the uncertain economic outlook, it may be more difficult than usual to follow Warren Buffett’s strategy of focusing on companies with economic moats. It remains unclear which sectors and companies will prosper in what could be a very different economy post-coronavirus.

As such, building a diverse portfolio could be more important than ever. In doing so, an investor can maximise their returns and limit risk over the coming years.

The post I’d listen to Warren Buffett and invest in stocks with wide economic moats appeared first on The Motley Fool UK.

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• £10,000 invested in easyJet shares at the start of 2026 is now worth…
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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.

It could be focused on the quality of a business, as well as its price. This may enable an investor to buy the most attractive companies while they trade at prices that undervalue their long-term prospects.

Through focusing on a wide range of sectors, it may be possible to unearth a diverse range of companies. This could limit risk in what remains an uncertain economic environment.

High-quality companies may be among the best stocks to buy now

Companies with solid financial positions and competitive advantages may feature on a ‘best stocks to buy now’ list. This doesn’t guarantee their investment success. However, they may be able to more easily overcome challenging operating conditions such as those currently in place for many companies.

Similarly, they could deliver higher profitability in the long run. This is because of their capacity to invest in new growth areas and rely on a loyal customer base.

Identifying such companies is very subjective. However, by assessing their annual reports and latest investor updates it may be possible to find them within a specific sector. Comparing them to sector peers may also make it clearer which companies have a more attractive growth outlook in a potential economic recovery over the coming years.

Buying undervalued shares

Companies that offer good value for money may be among the best stocks to buy now. Even if an investor is able to unearth a very high-quality business, paying too much for it can lead to disappointing returns. Such a company could lack a margin of safety. This may indicate investors have already factored in its future earnings potential.

Clearly, there are various methods to analyse companies. Different ones can be more relevant to different sectors. For example, the price-to-book (P/B) ratio may be more relevant for banks and REITs. Meanwhile, the price-to-earnings (P/E) ratio may be more useful when comparing consumer goods businesses.

Comparing a company’s valuation to its long-term average and its sector peers may provide guidance as to whether it offers good value for money at the present time.

Searching in a wide range of sectors

It may be prudent to search for the best stocks to buy now in a wide range of sectors. Otherwise, an investor may be limiting their choice to a small number of businesses. And that leads to higher risks because of a greater reliance on a concentrated range of industries.

A diverse portfolio may also be able to offer greater returns in the coming years. It may allow an investor to capitalise on a broader range of growth opportunities lacking in a concentrated portfolio. Although a diverse portfolio never guarantees positive investment returns, it may create a more favourable risk/reward opportunity for a long-term investor.

The post How I’d build a ‘best stocks to buy now’ list appeared first on The Motley Fool UK.

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• Decided not to bother with a Stocks and Shares ISA? You might be missing these 3 things!
• Why is everyone buying GSK shares?
• £10,000 invested in easyJet shares at the start of 2026 is now worth…
• 5 years ago, £5,000 bought 2,645 Barclays shares. But how many would it buy now?

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.