In fact I think that learning from Buffett’s approach can be very helpful at a time like now, when looking to build wealth.

Start with a simple question

To begin, forget about the stock market altogether. Instead, think about a business you know and understand. Warren Buffett always tries to stick to businesses he understands.

Ask yourself what chance that business has to succeed over the long term.

How big is its target market, what competitive advantages does it have – and are they likely to endure?

Then consider its economic model. Sometimes a big business with massive sales can still lose money, so understanding a business model matters.

That process is how Buffett determines whether a firm is the sort of great business he would like to own.

Valuation is key to successful investing

But Buffett does not just talk about great businesses. He talks about buying into great businesses at attractive prices.

That is a crucial distinction. Even a brilliant business can make a lousy investment if someone pays too much for their stake in it.

Turbulent markets generally do not alarm the Oracle of Omaha. If the underlying value of a business whose shares he owns as a long-term investor remains the same, he does not care if the stock market values them lower during a period of volatility.

But such periods – like the one we are in now – can offer the savvy long-term investor an opportunity, if they enable them to buy into a great business for an unusually attractive price.

A share to consider

As an example, one share I think investors should consider is homewares retailer Dunelm (LSE: DNLM).

The Dunelm share price has crashed 29% since the start of the year. That means it now sells for just 11 times earnings, while offering a dividend yield of 5.7%.

In fact, although payouts are never guaranteed, the prospective yield over the medium- to long-term could be higher, as Dunelm often uses surplus cash to fund special dividends.

Why the share price fall?

Weak consumer confidence and an uncertain outlook for the property market threaten to eat into demand for homewares. Higher logistics costs due to soaring oil prices could make imports costlier for Dunelm, eating into profits. Last month the company told investors that, “the consumer environment remains challenging, with variable trading patterns”.

I see those as temporary challenges, though. Like Warren Buffett, though, I take the long-term approach to investing.

People will keep buying homewares, even though demand may wax and wane across the economic cycle. Dunelm has a proven, profitable business model.

Its many unique product lines help give it a competitive advantage, as do its brand and large estate of shops. At its current price, I see it as a potential long-term bargain — alongside some other shares in the current market!

The post As the stock market moves down, I’m taking the Warren Buffett approach! appeared first on The Motley Fool UK.

Its vertically-integrated model gives it pricing power and margins that rivals struggle to match, reinforcing a genuine competitive advantage.

Trading has stayed resilient, supported by loyal customers and a value‑quality proposition that continues to outperform the wider homewares market.

So, with the shares looking modestly priced against this operational strength, where ‘should’ they be trading?

Growth momentum intact after H1 results?

Dunelm’s recent H1 fiscal-year 2026 results showed earnings dipping year on year, with profit before tax down 7.5% to £114m. This reflected softer trading over the period, in line with still-major cost-of-living pressures across the UK.  

Even so, the business continued to grow ahead of the wider homewares market. This was supported by rising sales (up 3.6% year on year to £926.3m), increased gross margin (up 2.1% to 40.5%), and broadly stable pricing.

Free cash flow remained exceptionally strong at £171m (up £2.9m), underlining the resilience of the model even against a tougher consumer backdrop.

Management now expects annual pre-tax profit to be at the higher end of market expectations — £214m (compared to £211m in 2025).

A risk remains that cost-of-living pressures will continue to weigh on the firm. However, I think the foundations are in place for earnings to recover as cost pressures ease and digital momentum continues. Analysts’ consensus forecasts reflect the same view, expecting Dunelm’s earnings to grow at an average 5.8% a year to end-2028.

Where ‘should’ the shares be priced?

A discounted cash flow (DCF) approach gives a clear, standalone picture of Dunelm’s underlying value, unaffected by over- or undervaluations across the sector as a whole.

It identifies a company’s ‘fair value’ by projecting its future cash flows and then discounting them back to today. Dunelm converts a very high proportion of earnings into free cash flow. And its steady mid‑single-digit growth outlook provides a solid foundation for such long-term modelling.

Analysts’ DCF modelling varies — some more cautious than mine — depending on the variables used. However, based on my DCF assumptions — including a 9% discount rate — Dunelm shares are 19% undervalued at their current £9.80 price.

This implies a fair value of £12.10.

The gap between the company’s current share price and its fair value is very important for long-term investors. This is because asset prices (including shares) tend to trade to their fair value over time.

My investment view

Overall, for long-term investors, I believe Dunelm offers a rare combination of quality, resilience and value.

The business continues to generate strong cash flows, even in a tougher consumer environment. And its disciplined approach to pricing and promotions supports both margins and customer loyalty.

With the shares trading around 19% below my estimate of fair value, I think the market has failed to properly price these factors in. But I think this will change, as Dunelm continues to demonstrate consistently robust earnings growth.

The dividend outlook adds an extra layer of appeal, with analysts expecting a yield of around 5% by 2028. This is unusually high for a retailer with this level of operational strength.

Taken together, I see Dunelm as a compelling opportunity to consider for investors seeking dependable long-term returns at a sensible price.

The post Down 21%, this underappreciated FTSE gem looks a major long‑term value opportunity appeared first on The Motley Fool UK.

Now, past performance is not necessarily indicative of what may happen in future. But here is a trio of UK stocks I think could potentially grow their dividends regularly in years to come.

Phoenix Group

The insurer Phoenix Group (LSE: PHNX) isn’t a household name, though with its planned name change to Standard Life, that may change.

Well-informed investors are clued in about the company’s 7.6% dividend yield, the highest of any FTSE 100 firm apart from Legal & General.

Like Legal & General, Phoenix aims to grow its dividend per share annually. It has done so over the past few years.

The financial service business is focussed on savings and retirement. With around 12m customers, it is a very substantial company.

It’s also strongly cash generative, helping to underpin the dividend. Phoenix’s businesses benefit from economies of scale, long-term policies being in place, and proven investment nous.

One risk I see is a property downturn forcing Phoenix to write down the value of its mortgage book. On balance, though, I see it as a UK stock for investors to conider.

Cranswick

Another name that’s unlikely to trip off most people’s lips is Cranswick (LSE: CWK).

But while many people might be unfamiliar with the FTSE 250 food company, some of its products may well have passed their lips. Cranswick’s customer list includes swathes of the country’s retailers, who sell its products under their own names.

Demand’s likely to stay high: people need to eat and Cranswick has developed competitive pricing and economies of scale.

Economies of scale are not always positive, though. Allegations last year of cruelty at some of the company’s large pig farms brought a reputational risk. I was therefore pleased to see the company commission an independent review into how it treats its swine and act on it.

Cranswick has grown its dividend per share for 35 years in a row.

The dividend last year was covered more than twice over by diluted earnings per share. With strong business performance, I think it could keep growing.

But at 18 times earnings, the Cranswick share price is not tasty enough right now for me to add the 2%-yielder to my portfolio.

Dunelm

It has not been a good month for homewares retailer Dunelm (LSE: DNLM). Its share price has tumbled 15% since the turn of the year.

That leaves it 19% below where it stood five years ago. At today’s price, I think investors should now consider this UK stock.

The share price fall was due in part to a profit warning this month. There are risks that weak consumer spending could eat into demand for some of Dunelm’s product lines, hurting revenues and profits.

But I see this as a well-run business with a strong positioning in the market. It has proven its model through multiple economic cycles. I expect it can continue to generate significant cash flows.

The company’s special dividend has moved around. But its ordinary dividend per share has kept growing annually in recent years.

I see the business as strong enough to maintain that trend. The ordinary dividends alone currently offer a 4.7% yield.

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That said, the trade-off is often volatility, which makes it vital to look carefully at dividend policies, payout ratios and long-term profitability.

When it comes to dividends, many investors prefer a history of consistent payments backed by strong financials. A high yield can look tempting, but without reliable earnings, it may not be sustainable. And that brings me to one lesser-known mid-cap company that caught my attention this week.

Dunelm’s impressive numbers

Dunelm Group‘s (LSE: DNLM) a well-known homewares retailer, selling everything from bedding and bathroom wares to rugs, curtains and furniture. It operates through physical stores, catalogues and its growing online presence. The company’s dividend yield is an eye-catching 7.2%, among the top 30 on the index.

The number that really jumps off the page though, is return on equity (ROE). At 121.78%, Dunelm boasts the highest figure across the entire FTSE 250. ROE measures how effectively a company generates profit from shareholders’ equity and, at first glance, this suggests the business is incredibly profitable.

Combined with a dividend track record that includes five years of uninterrupted payments and two consecutive years of growth, Dunelm certainly looks worth considering.

But as always, I think it’s important to dig beneath the surface.

The risks behind the rewards

While Dunelm’s ROE figure’s impressive, it doesn’t tell the full story. The company’s net margin is just 8.83%, and its free cash flow margin stands at 12.28%. These aren’t disastrous numbers, but they don’t suggest a business overflowing with profitability either.

More concerning is the dividend payout ratio, which is slightly above 100%. That means dividends aren’t fully covered by earnings, raising questions about sustainability if profits don’t keep up.

Then there’s the matter of debt. Dunelm has £377.7m in total debt compared with just £118m in equity. That imbalance is significant. Revenue and earnings are forecast to rise modestly in 2026, but there’s no certainty that those expectations will be met.

If equity weakens further, the company could find itself under pressure to service its obligations. And that raises the real risk of a dividend cut.

In fact, I can’t help but think that Dunelm’s huge ROE figure may be flattered by its financial leverage. High debt levels can artificially boost ROE, making a business look more profitable than it truly is. But if earnings stumble, leverage works in reverse – magnifying losses and potentially putting the balance sheet under serious strain.

My verdict

Dunelm has an attractive yield, a recognisable brand and a dividend history that income investors might find encouraging. But with dividends not fully covered and debt levels sitting uncomfortably high, I think it’s one that investors need to weigh up very carefully.

For those willing to consider risk, Dunelm could still find a place in a diversified dividend portfolio. But without stronger earnings growth, its financial leverage may prove more of a burden than a benefit.

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Correctly identifying and quantifying the price-value gap is where sustained big profits lie over time, in my experience. This comprises several years as a senior investment bank trader and decades as a private investor.

The second factor is whether it pays an enticing yield, which to me is 7%-plus. Why this number? It is because the ‘risk-free rate’ – the 10-year UK government bond yield – is around 4.6%, and shares are not risk-free.

And the final element is strong earnings growth prospects. It is these that drive gains in any firm’s share price and dividends going forward. The baseline number I want to see here is also 7%+ right now.

Why? Because otherwise the management might as well sell all the firm’s assets and investment in the UK 10-year or 30-year government bonds. The 30-year paper currently yields 5.5%.

How does this firm stack up?

On the positive side, Dunelm (LSE: DNLM) shares generate a current dividend yield of 7.5%, which meets that criterion for me. This includes a special dividend last year, but it has been paying a special dividend every year since 2021.

On the share price, a discounted cash flow analysis shows it is 22% undervalued at the current £10.66. This modelling highlights where any stock should trade, derived from cash flow forecasts for the underlying business.

Therefore, in Dunelm’s case, the fair value of its stock is £13.67. This does not meet my requirements on this criterion.

Finally, on earnings growth prospects, analysts’ forecast 5.1% a year to end fiscal-year 2027/28. Again, this falls short of my requirement here. So the stock is not currently for me, but it could be in the future. This is based on positives I see in its results.

Solid annual results

Dunelm spelt out its key current business risks in its 9 September fiscal-year 2024/25. It said: “We are yet to see signs of a wider consumer recovery, and consumer confidence has remained lacklustre”. These are clear risks for the firm’s earnings outlook and indeed for many firms in the retail sector. But following this, its share price fell 10% on the day.

However, the market reaction failed to reflect either the preceding or subsequent sentence in the results. The former was that Dunelm was reporting another successful year. The latter was that it will continue to raise the bar on its products and the proposition it offers.

On the former, total sales rose 3.8% year on year to £1.771bn, while profit before tax increased 2.7% to £211m.

While on the latter, the firm has put into action growth plans across three strategic pillars. These include elevating its product offer, connecting to more customers and finding more ways to harness its operational capabilities. Together, these aim to extend the firm’s position as a multi-channel, multi-category specialist.

Consequently, although it is not for me right now, I think it may be worth considering by others whose portfolios it suits.

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Here are three I think it is worth considering as one tries to build passive income streams for the long term.

Henderson Far East Income

To start with is a high-yield one. In fact, the 10.8% dividend yield of Henderson Far East Income is something of a red flag. Often such a high yield can suggest the City is nervous about the prospect of dividend cuts.

That is understandable, as the fund is focused on the Far East and owns stakes in companies that could suffer from a weak global economy or tariff disputes, such as its largest holding Evergreen Marine Corp Taiwan.

But its carefully chosen portfolio of dozens of companies also exposes the fund to what I see as some compelling growth stories. It has a proven record of generating sizeable cash flows from its portfolio of Asia Pacific-exposed investments.

British American Tobacco

While Henderson Far East has an impressive recent record of dividend growth since its launch 19 years ago, an even longer run of annual dividend per share growth can be seen at British American Tobacco (LSE: BATS). It has raised the payout per share each year this century.

Management plans to continue that trend and I think it will work hard to do so, as dividends are central to the investment case. Declining cigarette use means that British American, like other tobacco shares, are not seen as growth stories even as they develop non-cigarette product lines.

Will British American keep paying out the sort of dividends that has earned it a place in many passive income portfolios? It is easy to focus on the risks – the company’s debt is another, besides declining cigarette use – but I do see some strengths to the business too.

It is massively cash generative and has a stable of premium brands such as Dunhill and Pall Mall. That, along with the addictive nature of smoking, gives it significant pricing power.

Dunelm

Homewares retailer Dunelm (LSE: DNLM) has a 3.6% dividend yield. That means someone investing £100 today will hopefully earn £3.60 in dividends annually.

That yield is already fairly attractive, in my view. But it only tells part of the story, as it excludes special dividends. Dunelm sometimes uses such dividends to distribute spare cash. That can be good news for passive income hunters.

Last year, for example, its total dividend per share came in at 78.5p. That is around 6.5% of the current share price – an even more attractive yield than the 3.6% yield I mentioned (from ordinary dividends alone).  

The company benefits from an extensive network of stores and strong digital presence that now accounts for 42% of total sales. Lots of unique products help set it apart both online and offline.

At 16 times earnings, the share price does not strike me as cheap but I do think Dunelm is a high-quality company with a proven business model. Global shipping rates remain volatile, a risk to its profit margins.  

While that remains a risk, Dunelm reckons its “strong commercial and operational grip” means gross margin for its most recent financial year will actually show improvement.

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Yields on the FTSE 250 are currently higher than normal as its performance lags behind the FTSE 100. This could be an opportunity.

My top UK dividend picks today

I’ve identified three UK stocks with attractive yields, strong financials and long-term potential that I think are worthy of further research.

Dunelm Group

The homewares and household goods retailer Dunelm Group operates approximately 80 stores across the country. It has a solid track record of increasing dividends for almost 20 years, from 3.8p a share to 43.5p. It has also paid a special dividend for the past four years, meaning its 4.5% reported yield has been closer to 8%.

But recent price activity has been less impressive, with the stock down 18% in the past five years. Most of the losses occurred during the 2022 market downturn, revealing the business’s sensitivity to economic troubles. This is a significant risk to consider as US trade policies could further disrupt the global economy this year.

Still, I feel the excellent dividend track record makes it worth considering.

OSB Group

OSB Group (LSE: OSB) is a UK challenger bank based in Kent that offers specialised mortgage and loan products. It’s been paying dividends for 10 years, with a yield typically between 6% and 9.4%.

Currently, it appears to be undervalued, with a price-to-earnings (P/E) ratio of only 4.27 and a price-to-sales (P/S) ratio of 0.76. Those are both well below average, suggesting room for growth.

However, that could be difficult as it faces strong competition from the UK’s many large, established banks. In times of economic unrest, citizens tend to favour the perceived safety of brands they recognise. That’s a risk OSB must overcome if it hopes to continue growing.

Recent performance has been staggered, with the bank’s net margin falling to 7.8% in H1 2023 before recovering to 16.14% in H1 2024. The bank’s enterprise value lags, having fallen to £5.79bn in H1 2024 after peaking around £7.87bn in H1 2023.

As a shareholder, it has served me well and I believe investors would be smart to consider it. 

Pets at Home

I’m not a pet owner but have long considered the potential of Pets at Home (LSE: PETS). Here’s why I think savvy investors should do likewise. 

It operates through various segments, selling pet accessories, grooming and vet services. Over the past decade, it’s made several large dividend increases such as a near-50% jump in 2022. This affirms its dedication to shareholder returns.

But recent results underwhelmed shareholders, dragging the price down to a five-year low in November 2024. High inflation has forced consumers to cut down on expenses, threatening the company’s bottom line. There are signs it may drop this year but if it rises again, Pets could suffer further losses.

The full-year dividend has grown at a rate of 21.8% per year, from 5.4p in 2015 to 12.8p last year. As the price has fallen 50% since 2021, the yield has increased from 1.8% to 5.8%. This adds to the stock’s attractive valuation, with a P/E ratio of 11.7 and a P/S ratio of 0.72.

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Here are two shares on my watchlist that I think are excellent businesses. I would be happy to buy shares next year if their price comes down to what I see as an attractive level.

Dunelm

At face level, Dunelm (LSE: DNLM) might not even seem expensive. After all, its price-to-earnings ratio of 14 is lower than that of some shares I bought this year, such as Diageo.

However, I have been burnt owning retailers’ shares before (such as my stake in boohoo).

Retail tends to be a fairly low profit margin business, so earnings can fall significantly for relatively small seeming reasons. Last year, for example, Diageo’s after tax profit margin was 19%. Dunelm’s was less than half of that, at 9%.

Dunelm’s business is run efficiently, it has a large shop estate, and growing digital footprint and thanks to many unique product lines it can differentiate itself from competitors. Sales have grown considerably in recent years.

Created using TradingVew

Dunelm is a solid dividend payer too. The yield from ordinary dividends is around 4.1%.

But the company has often paid special dividends, meaning the total yield has often been higher than the ordinary dividend yield alone.

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Still, the Dunelm share price has risen 57% since September 2022.

That looks steep to me given that sales growth in the most recently reported quarter was 3.5% — perfectly respectable in my view, but not spectacular.

A weak economy and increasingly stretched household budgets could eat into sales and profits in 2025, I reckon. If that happens and the share price falls enough, my current plan would be to buy some Dunelm shares for my portfolio.

Nvidia

I reckon it is easy to look at the Nvidia (NASDAQ: NVDA) price chart and immediately think “bubble!”

Indeed, the P/E ratio of 53 offers little or no margin of safety for risks such as a pullback in AI spending once the initial round of big installations currently underway has run its course. That helps explain why I have not bought the shares this year.

Still, that P/E ratio is despite Nvidia stock rising 2,175% in the past five years alone. The price has soared, but so too have earnings.

Created using TradingVew

Nvidia is not some meme stock without a long-term future. It is a hugely profitable, successful company with a proven business model.

Its competitive moat is also huge in my view – rivals simply cannot make many of the chips Nvidia does even if they want to.

The valuation alone is why I have not bought Nvidia stock this year. It is a share I would be happy to buy (in spades) in 2025 if the price looks more reasonable to me.

The post 2 brilliant (but very different) shares I want to buy if they get cheaper in 2025! appeared first on The Motley Fool UK.

It would give me a longer timeframe in which to reap potential investment rewards, for example. Hopefully, it could also mean that any beginner’s mistakes I made would be less costly.

If I had never invested in the stock market before and wanted to use a spare £400 to start buying shares this week, here is how I would go about it.

Starting small and aiming for growth

With £400, it might seem tempting to go for a few small companies that, if things turn out the right way, could go stratospheric.

I would take a different approach, for a few reasons. I am an investor not a speculator and with only £400 to invest I would certainly want to avoid unnecessary risks. Rather than investing in companies that might become massive, I would prefer to invest in ones that are already massive and have proven business models.

By doing that, I would focus on aiming for companies I thought had good long-term prospects and an attractive price, alongside a proven business model. The future is unpredictable though, so I would aim to reduce my risk by spreading the £400 over several different shares.

Finding shares to buy for the first time

With thousands of shares available to buy, where would I start as a beginner? As billionaire investor Warren Buffett emphasises, I would stick to my circle of competence, picking businesses I felt I understood and so could analyse.

I would look for a company I expected could do well in future and had a decent balance sheet. Too much debt can kill even a strong business.

As an example, one share I think investors could consider buying is Dunelm (LSE: DNLM). The business operates in an area likely to see strong long-term demand, as people continue to want to decorate or redecorate their living space.

Thanks to unique product lines and a large customer base, Dunelm has what I see as a solid competitive advantage. It has been consistently profitable and I also like the dividend record. It often pays special dividends when it has spare cash, although no company’s dividend is ever guaranteed to last.

Over the past five years, the Dunelm share price has risen 47%. That means its price-to-earnings ratio (a common valuation metric) is 16, which I do not see as a bargain but think is fair for a business of Dunelm’s quality.

Starting the journey of building wealth

Like any share, Dunelm has risks. A weak property market could hurt sales and revenues, for example. Managing risks both obvious and unseen is a key skill for any investor and one I would start honing from day one.

I would start buying shares by setting up a share-dealing account or Stocks and Shares ISA today, then looking into what businesses appealed to me as investments at their current price.

The post With a spare £400, here’s how I’d start buying shares in massive businesses! appeared first on The Motley Fool UK.

Here are three that I’m currently thinking of adding to my portfolio very soon.

On my (income) radar

An increasingly unstable Middle East and the ongoing, dreadful conflict between Ukraine and Russia has led to an earnings purple patch for passive income powerhouse BAE Systems (LSE: BAE). Looked at purely from an investment perspective, this should mean that the company will have no issue in continuing to distribute dividends to shareholders.

Sure, nothing is guaranteed. Defence spending can be lumpy for a start. BAE stock also trades at 19 times forecast earnings. That’s far above its five-year average.

On the other hand, the FTSE 100 beast has the sort of income track record that would turn most companies (and their investors) green with envy. We’re talking about dividends rising year-after-year for decades. I just can’t see that trend ending anytime soon.

This stock goes ex-dividend on 24 October. So, I’ll need to make a decision soon if I want to receive the 12.4p per share interim payment.

Chunky dividends

Also going ex-dividend is homewares retailer Dunelm (LSE: DNLM).

Despite the cost-of-living crisis, shares in the Leicester-based business have climbed 16% in the last 12 months. That’s almost identical to that achieved by the FTSE 250 index as a whole. But I wonder if the former might just outperform from here if interest rates continue falling and consumer confidence improves.

Buying a slice of this company before Halloween would entitle me to a 27.5p per share final dividend. Moving forward, analysts have already penciled in a 15% jump to the FY25 payout, assuming their earnings projections are correct. If this came to pass, that would mean a chunky dividend yield of 5.7% using today’s price.

I find it best to treat forecasts with a smidgen of salt. A bounce in inflation could easily interrupt this momentum.

Fortunately, a trading update is scheduled for 17 October. I’ll give this a read before making any move.

Back on track?

A final candidate is real-estate investment trust (REIT) Tritax Big Box (LSE: BBOX).

With big-name clients including Amazon, Tesco, and – yes – Dunelm, it was no surprise that this company became very popular with investors over the pandemic as demand for logistics space soared.

Unfortunately (but somewhat inevitably), the good times couldn’t last. As interest rates were lifted to tackle inflation, anything property-related was dumped from many portfolios.

Tritax shares have now been trading roughly between 165p and 125p since for about two years. Still, at least investors have enjoyed some payouts in the meantime. Again, the gradual lowering of rates could provide a welcome boost to the price and the income stream.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Speaking of which, this stock also goes ex-dividend on 31 October (1.825p per share). Analysts currently have the company yielding just over 5% for FY24, rising to 5.3% in 2025.

Given that I already have exposure to property in my portfolio, I’m going to do a bit more digging over the next couple of weeks before I decide whether to buy here.

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