Owning a home is a dream many people have. But saving for a deposit on a mortgage often takes time. I wouldn’t pile up cash in a low interest bank account. Instead, I’d prefer to put my savings to work until I had enough to fund a deposit.
I’d do that by putting the money into some shares. But I’d be careful to choose what I thought were reliable names.
A choice to grow income over several years
It can take several years to save enough for a home deposit. I’d want income during that time to help increase my total return. I would likely go for a strong income pick.
I like British American Tobacco (LSE: BATS) for income, though it won’t be suitable for ethically focussed portfolio. With a yield above 7%, the Rothmans and Lucky Strike owner is one of the higher yielding shares in the FTSE 100 index. That should allow me to collect substantial payouts in coming years and help my saving for a deposit. The company hasn’t cut its dividend for over 20 years. That gives me more confidence that the dividend will be sustained.
Even during difficult economic times, its core tobacco business tends to hold up fairly well. In the first half of 2020, for example, it managed a 0.8% increase in revenue in the face of the pandemic. The share price has fallen in recent years and is now a quarter below its high from the past year. If it keeps moving about, it could still go lower. But over the longer term, I see BAT as undervalued. So I would hope that the current share price might even grow in the next few years. Meanwhile, the juicy dividends would help me build my savings.
A share I’d buy for growth while saving for a deposit
Income would help my savings grow. But some capital growth would also be welcome. That would help me reach my savings target faster.
One share I’d consider buying for its growth potential is Unilever (LSE: ULVR). The company produces a stable of household consumer goods brands such as Persil, Dove, and Domestos. Such staples tend to have reliable long-term sales. I expect additional pandemic-related demand to drive higher than usual growth on hygiene brands such as Domestos in coming years. I like the shares as a growth pick but they also yield over 3%, with quarterly dividend payouts.
That income could also help my savings. I’d hope the dividend record would continue during my ownership. But my main focus would be on the potential for Unilever’s share price to grow over time. The shares are about 10% down on their year high. They trade on a price-to-earnings ratio of around 19. I don’t think that is cheap. But with the expected growth in Unilever’s hygiene portfolio and a progressive dividend policy, I am optimistic that the shares will continue to grow in value in the coming years.
Dripping money into those two shares over time, I’d expect my saving for a deposit to produce visible rewards as the cash piled up.
chris231 owns shares of British American Tobacco. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.