As interest rates start to fall over the next two years, savers will likely start looking for better returns on their capital. And the best place to do that, in my opinion, is stocks and shares.

Investing in stocks

If I were to invest £10,000 in stocks today, at the very best, I could probably achieve around £800 in annual income from dividend-paying stocks. This would include investing in UK companies like Legal & General, Phoenix Group, Lloyds, British American Tobacco, and Rio Tinto. I could also look at US-listed companies like Nordic American Tankers.

However, if £800 isn’t enough, I may wish to look at reinvesting my returns every year to let my portfolio grow. And remember, growth compounds. Every year I’ll have a bigger portfolio, which will generate greater returns. And the longer I do this, the faster my portfolio will grow.

I don’t have to do this by investing in dividend stock. Many companies, notably those that don’t pay a dividend, reinvest their earnings back into the business. In turn, this can lead to share price appreciation. Just take a look a Nvidia and Super Micro Computer, which have continually reinvested and are now reaping the benefits.

Now, let’s take the below as an example. Just look at how £10,000 can grow over 30 years, assuming the investor can realise a 10% annualised growth rate. With this much invested, and assuming an 8% dividend yield is still achievable, I could earn around £15,040 each year.

Building a bigger pot

There are several ways to identify companies that can help my portfolio grow. We can use ratios like the price-to-earnings metric to identify undervalued companies or the price-to-earnings growth ratio to find businesses with under-appreciated growth trajectories. 

But it’s best to make investment decisions using a host of metrics and indicators. One stock I’ve been investing in is Abercrombie and Fitch (NYSE:ANF). While it may appear expensive, the company just keeps on surprising analysts — in a good way — and recently surpassed earnings estimates by around 4%. 

The company’s sales have continued to rise compared to peers, reflecting an impressive strategic shift and rebrand as an ‘all-American’ business. In Q4, the firm said that comparative sales had increased 16% versus the same quarter last year. 

In turn, this has contributed to a very strong balance sheet and net cash position. In Q4, Abercrombie said cash and equivalents amounted to $901m compared to $518m last year. 

While we may see some negative pressure due to the resumption of student loans in October and high interest rates, this company has grown sales and improved margins during challenging economic conditions. It’s the type of winning stock I want in my portfolio to build wealth and eventually give me a bigger pot to drawdown from. 

The post £10,000 of savings? Here’s how I’d aim for £15,040 of passive income annually appeared first on The Motley Fool UK.

Abercrombie & Fitch

What it does: Abercrombie & Fitch sells casual clothing and accessories with a focus on a youthful and trendy lifestyle.

By Dr James Fox. I certainly should have clocked this stock sooner than I did. Abercrombie & Fitch (NYSE:ANF) shares have been soaring over the past 12 months – the stock is up 273%. 

Of course, it always feels like there’s plenty of risk involved when investing in a stock that has performed so well over the past year. However, momentum is often one of the best indicators of forward performance. 

And while, I recognise that the resumption of student loan repayments in the US could pose an issue to this clothing company’s resurgence, Abercrombie remains a highly attractive opportunity for me. 

The company – which was the must-have when I was at school – has undergone a rebrand that keeps delivering, beating earnings expectations over and over again. 

And clearly analysts aren’t fully appreciating the power of this rebrand. In November, the firm reported EPS of $1.83, representing a $0.63 beat. 

What’s more, the company’s forward P/E still represents a 5.3% discount to the sector. 

James Fox has positions in Abercrombie & Fitch.

Airtel Africa

What it does: second-largest telecoms operator in Africa, also runs a popular mobile banking business. Operates in 14 countries.

By Roland Head. I bought shares of Airtel Africa (LSE: AAF) to my portfolio in December, as I feel the company’s affordable valuation and 30%+ operating profit margin provide attractive long-term opportunities.

In my view, the African markets where it operates – the largest is Nigeria – have greater growth potential than mature Western European markets. The downside to this is that these markets can also be less stable and predictable than elsewhere.

One challenge currently affecting the business is June’s devaluation of the Nigerian naira. Most experts seem to believe this will be beneficial in the longer term. However, foreign exchange losses meant that half-year profits for Airtel’s current financial year were cancelled out by a stonking $317m currency loss.

I believe the worst is over and that many of the risks facing Airtel Africa are priced into its shares. Forecasts for 2024/25 give a price-to-earnings ratio of 11 and a 3.7% yield. I think that’s attractive.

Roland Head owns shares in Airtel Africa.

ASML Holding

What it does: ASML Holding provides manufacturing equipment for all major semiconductor producers in the world.

By Oliver Rodzianko. I bought ASML Holding (NASDAQ:ASML) shares for the first time in December 2023. This has to be one of the most exciting investments I’ve ever made.

Most technology companies worldwide depend on ASML Holding for their lithography manufacturing systems.

I reckon this is the semiconductor king. It’s the only company capable of providing Extreme Ultra-Violet lithography to produce advanced AI chips.

Taiwan’s world-famous semiconductor foundry (TSMC) is among its major clients. As are Intel, Nvidia, Samsung, and so on.

But I’m being cautious. With Taiwan a hot spot for Chinese and American political interests, semiconductors could be hit hard if a war breaks out, God forbid.

It has a net margin of 28% and a 24% three-year average annual revenue growth rate.

It doesn’t get better than this, in my opinion.

Oliver Rodzianko owns shares in ASML Holding.

Cresud

What it does: Cresud cultivates crops, raises livestock, and develops land in Argentina.

By Mark Tovey. After Argentina’s recent presidential election, which saw a free-market economist come to power, I decided to invest in Cresud (NASDAQ:CRESY). This company, an established name in Argentinian agriculture since 1936, has extended its operations beyond Argentina to Brazil, Bolivia, and Paraguay.

Cresud has a significant market cap of $1.5bn and an attractive price-to-book (P/B) ratio of 0.6. Its stock price has already experienced a 20% run-up over the past month, driven by investor optimism about the new president, Javier Milei. Milei has promised to take a chainsaw to taxes and capital controls that strangle Argentinian exporters. This could boost Cresud’s profitability – especially given the backdrop of global food shortages exacerbated by the war in Ukraine.

The main risk of investing in Cresud is the opposition Milei faces from labour unions. The new president’s austerity programme could spark an uprising that gets him chucked out of the Pink House onto his ear. 

Mark Tovey owns shares in Cresud.

Dr. Martens

What it does: Dr. Martens is a well-known British footwear company. The firm also makes clothing, bags, and accessories. 

By Stephen Wright. After an 80% decline since its IPO, I think Dr. Martens (LSE:DOCS) are good value. There are two reasons why the stock has been falling – weak consumer demand in the US and bad execution of its online business. 

The risk is that this could continue for some time. But with management guiding for revenues declines in 2024, I think a lot of bad news already baked in and the stock looks attractive – that’s why I’ve been buying it.

I also think the market is mispricing the possibility of an interest rate cut in the US this year. If that happens, consumer spending might improve more quickly than people anticipate. 

I don’t know whether the stock has reached its low point yet. But I do know that it’s reached a level where I think the shares looks very attractive from a valuation perspective – attractive enough for me to have bought, anyway.

Stephen Wright owns shares in Dr. Martens.

Moderna

What it does: Moderna is a biotechnology company that develops messenger ribonucleic acid (mRNA) therapeutics and vaccines.

By Ben McPoland. Last year, I picked Moderna (NASDAQ:MRNA) as a top stock for 2023. Unfortunately, this proved to be more of a top dog (not in a good way), as the share price fell 44% due to declining Covid-related sales. 

However, as I write, it has rebounded 55% from its nadir after the firm announced incredible results for its skin cancer vaccine. In combination with Merck’s therapy Keytruda, it lowered the risk of death or relapse in patients by half after three years. And it reduced the risk of melanoma spreading by 62%. It’s quickly moved the mRNA jab into phase 3 trials for lung cancer.

As a reminder, mRNA serves as a kind of biological code that provides instructions for cells to produce proteins. In this sense, it has similarities with software, where the code can be tweaked and improved. This could make Moderna’s platform scalable beyond anything seen before in healthcare.

It’s why Scottish Mortgage Investment Trust has the stock sat alongside Nvidia, one of the most innovative tech companies ever.

Despite the risk of clinical setbacks, I recently added to my holding. 

Ben McPoland owns shares of Moderna, Nvidia and Scottish Mortgage Investment Trust.

Safestore

What it does: Safestore is the UK’s largest self-storage unit provider, with over 130 stores nationwide. 

By Charlie Keough. As we begin 2024, I continue to view Safestore (LSE: SAFE) shares as a bargain — as such, I recently bought more.  

There are a few standout reasons why I like the stock. Firstly, with a price-to-earnings ratio of just 6.7, it looks cheap. To add to that, with a 3.5% yield, this offers the opportunity for me to generate some passive income.  

Due to strong growth in recent years, it has become the market leader in the UK. It’s now looking to expand, with locations such as the Netherlands and Germany added to its portfolio last year.  

The debt it has may be a concern. After all, it’ll be a while before we see interest rates fall to a more sensible level. This will make it more difficult to pay off.  

However, I have high hopes for 2024 and beyond. I plan to continue topping up my position in the weeks and months ahead.  

Charlie Keough owns shares in Safestore. 

The post 7 shares that Fools have been buying! appeared first on The Motley Fool UK.