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1 big risk to UK shares in 2021 and how I’d invest for great returns anyway

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While going over updates for FTSE 100 and FTSE 250 shares earlier today, I found a curious trend. These UK shares are some of the biggest gainers. But their updates aren’t great.

In fact, some of them are still quite weak. I’m talking about stocks like luxury giant Burberry, publisher Pearson, and retailer WH Smith

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So why are their prices rising? 

The big risk for UK shares

I think the combination of growing investor confidence and their changed assessment of company performance is the reason. So, the fact that these companies’ revenues are down, but less so than in their previous updates, is seen as positive. 

And there’s no doubt that progress is being made. 

But I think it’s important to remember that we are still living in a pandemic and it will be some time before we can truly claim victory over it. Until such time, there is still the risk of Covid-19 spreading, especially with new variants around. 

The longer the pandemic drags on, the worse it will be for business, making many companies and share prices increasingly vulnerable. 

How I’d buy UK shares now

Does that mean we should refrain from buying the affected UK shares?

I think there’s still much value to many of these stocks and they aren’t going under in a hurry. So the short answer is, no. At the same time, it’s important to keep in mind that these stocks aren’t exactly financially strong right now either. 

I’d buy some of them — in fact, I already have. 

Safer growth options

But I’d also hold shares with a high likelihood of growth and less risk. This will ensure that at least part of my portfolio is firmly on the growth path, even if the rest might struggle because of any untoward event. 

Some of the shares that did well during 2020, will continue to do this year, in my view. And there’s plenty of choice. 

FTSE 100 healthcare companies like AstraZeneca and Hikma Pharmaceuticals are examples. Support products and services providers like hygienist Rentokil Initial and face-mask and gloves distributor Bunzl are others. 

Ensuring some passive income

I’d also ensure that there are income-generating UK shares in my portfolio. This will ensure passive income (as companies increasingly start paying dividends) at the very least, even if the overall market is indifferent. 

The catch though, is this. I want to buy UK shares with relatively stable dividends. The large-scale disruption last year led to dwindling in dividends across the board. Some companies were exceptions however, and I’d consider them as potential income investments. 

The FTSE 100 industrial metals miner Rio Tinto is an example of a stock that not just continued to pay dividends, it also paid an interim dividend. With a yield close to 5%, it’s definitely one to consider. National Grid, with an even better yield of 5.6%, is another one, as are other FTSE 100 utilities

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Manika Premsingh owns shares of AstraZeneca and Rentokil Initial. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

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