Legendary US fund manager Peter Lynch once commented that “the best stock to buy may be the one you already own”.
Mr Lynch ran Fidelity’s Magellan investment fund for 13 years, during which time he delivered an average annual return of 29%.
His view was that one of the most important aspects of investing was to understand what you were investing in. If you already own a stock that’s performing well, then why not buy more, instead of speculating on something new?
Here are three stocks from my portfolio which I’d be happy to buy today.
Cash cow
Insurance group Aviva (LSE: AV) gets a lot of stick from investors for its slow growth. It’s true that the group has lagged the growth of rivals such as Legal & General and Prudential in recent years.
Brexit fears aren’t helping this UK-focused business, either — the Aviva share price has fallen by about 20% over the last two years.
However, former boss Mark Wilson fixed the firm’s finances and boosted its performance. Cash generation has been good too. I think that new boss Maurice Tulloch has inherited a much sounder platform to build on.
As an income investor, what attracts me is that Aviva’s 8% dividend yield looks perfectly affordable, based on recent years’ trading.
Although the company does have a record of dividend cuts at difficult times, I don’t see any reason to expect one at the moment. I remain a buyer.
A sin stock yielding 11%
People have been predicting the demise of big tobacco stocks for at least 20 years. I guess one day these predictions may come true. But I’m not sure that matters for investors in Imperial Brands (LSE: IMB).
Profits look fairly stable at the moment, despite this week’s warning that sales growth will be slower than expected. The shares offer a covered dividend yield of about 11%. If this can be maintained, shareholders will get their money back in 10 years, even if the shares fell to zero.
I don’t expect that to happen.
The planned sale of Imp’s premium cigar business should generate cash to cut debt and invest in new products. And despite falling cigarette volumes globally, group sales outperformed the market last year, with core brands gaining market share.
With the shares trading on less than seven times earnings and offering a cash-backed 11% dividend yield, I see Imperial Brands as a contrarian buy.
A long-term buy
The Royal Bank of Scotland Group (LSE: RBS) share price gained about 4% last week, after insider Alison Rose was confirmed as the group’s new chief executive.
According to press reports, Ms Rose has a reputation for “quiet competence”. That sounds promising to me, as her role will require her to improve the bank’s financial performance and its reputation for integrity.
The RBS share price looks cheap, at a 26% discount to the bank’s tangible net asset value of 289p per share. This has been justified in the past by loss-making performance and no dividend.
But the picture is changing. A return to profits means that the bank’s shares now trade on eight times earnings. Brokers expect a generous special dividend this year, lifting the total payout to 23.9p — that’s a yield of about 11%.
I expect a smaller dividend next year. But I think RBS could be a good long-term buy for patient investors.
