The goal of any investor is to find cheap businesses and add them to their portfolio. This seems easy enough and it’s the key to billionaire Warren Buffett’s investing strategy. Very little is known about how the new Covid variant will affect our lives. But fears around it have caused markets to slip everywhere around the world. Not one to sit on the side-lines, I’ve been taking this opportunity to find the best cheap UK shares I can.

Undervalued, not cheap

While cheap may be the word we all like to hear, there is a difference between it and undervalued. Something that is cheap may simply not be worth that much. What I want is to find shares that cost very little, but that I also think are worth more.

How much has a company made over the past few years? What are its profit margins? Does it need to pay down huge sums of debt or keep investors interested with large dividends? All of these factors are important in my decision making under ordinary circumstances, but they’re vital when markets are falling. How else can I predict which shares will regain their value?

Biggest losers

While it is tempting to simply buy the shares that have fallen the most, I’m choosing not to do this. Many of the worst effected companies are ones hurt by lockdowns and travel restrictions. EazyJet and IAG have fallen 18% and 23% respectively since November.

These companies, and others like them, were already struggling through the pandemic. Under ordinary circumstances, budget airlines like eazyjet operate on very small profit margins anyway. The pandemic forced them to take on large amounts of debt to stay afloat, which, with those aforementioned small profit margins, will take decades to pay back.

Great companies

To find a share that is truly undervalued, I need to think of a company whose businesses have thrived over the last few months, but has still been affected by the overall market downturn.

If this was March 2020, I would have said Amazon or Google. Tech companies have few overheads and allow us to do things from the comfort of our home. Unfortunately, the world seems to have learned this now. Google’s share price only fell by 5% over the course of November, but has since recovered.

If we do enter another lockdown then my top British company is Naked Wines. Naked Wines is a wine delivery service which offers customers affordable access to high quality wines from around the world. The company often has exclusive access to wines and is able to offer even greater affordability through its ‘angels’ subscription service. Naked Wines saw a year of unprecedented growth over the 2020 lockdown period and, while growth has slowed in recent months subscriber numbers remain strong and it has been able to pay down a lot of its debt.

There is a risk of course that the novelty of home delivered wines may wear off, especially once the pandemic is in the rear-view mirror. The share price has already fallen 22% since September. However, I personally I think this one has a lot of staying power. I’ve grown fond of the service and intend to remain a customer in the future.

The share price has been fallen by about 10% since November and trades for about 660p, making this company a no-brainer buy for me.

James Reynolds has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Penny stocks are often unfairly maligned as a share sub-class which are high risk. Companies that fall into this sub-£1 category are regularly considered as more financially lightweight than other more expensive UK shares.

It’s a charge that can prompt speculation of under-par dividends, a lack of money to invest for growth, and insufficient financial strength to survive when profits slump.

Dig a little deeper though, and it’s clear to see that this doesn’t always hold up. Some of London’s biggest companies can be bought at very little cost. At 46p per share, Lloyds trades well inside penny stock territory, while robust FTSE 100 stocks ITV and JD Sports Fashion have also traded below £1 relatively recently (ITV as recently as the spring, in fact).

2 top penny stocks for a passive income

So it’s my opinion that, with a little digging, it’s possible to find penny stocks that can provide me with a decent passive income. I’m not just talking about shares that can provide me with big dividends in 2022 either.

There are many cheap UK shares like this I think could provide juicy payouts in the long term, a critical thing to remember when it comes to hunting for passive income.

I think these top penny stocks will deliver big dividends in 2022 and keep growing shareholder payouts beyond next year. Here’s why I’d buy them for my UK shares portfolio today.

#1: Assura Group

I believe Assura Group (which trades at 69p) is a rock-solid dividend share for me to buy today. It rents out primary healthcare properties such as GP surgeries, assets which occupancy rates and income from remain constant at all points of the economic cycle.

This excellent earnings visibility means that it’s able to keep raising annual dividends even during the ongoing Covid-19 crisis.

The fly in the ointment is Assura’s commitment to growth via acquisitions. This leaves it open to risks that can harm shareholder returns, such as overpaying for an asset. I still think it’s a great dividend buy despite this risk though. For the year to March 2022, Assura carries a 4.4% dividend yield.

#2: Greencoat Renewables

Like our need for healthcare services, our demand for electricity to keep the lights on and the kettle boiled also remains stable, regardless of broader economic conditions. This is why I’d buy Greencoat Renewables to generate passive income.

This particular penny stock owns stakes in wind farms in Ireland and is pushing into mainland Europe to deliver future earnings growth.

I’m confident that Greencoat Renewables (which trades at €1.10 per share) has the balance sheet strength to keep acquiring assets while paying big dividends. So do City analysts. The renewable energy stock carries a meaty 5.7% dividend yield for 2022.

I’d buy it for my portfolio, despite the threat that profits could take a hit if the wind stops blowing. Calm conditions reduced electricity generation by a third at FTSE 100 firm SSE in the first half.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV and Lloyds Banking Group. 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.

One of my main investing goals is to build passive income. It can be a great way to boost a salary, and to provide some extra spending money. But if I can grow my passive income over time, then I’ll be a lot better off in retirement too.

I think dividend stocks are a great way to start building passive income. But what about reinvesting the dividends? It might sound counterintuitive to reinvest the income from dividends at first. However, it could be the best option when first starting out. Here’s why I reinvest all of my dividends today.

Some assumptions

I designed two portfolios to decide whether I should reinvest my dividends.

I assumed an annual 10% growth rate in stock prices. I set the dividend yield at 5%, and assumed the dividend would grow 5% each year. I also chose an initial portfolio value of £10,000 that would be invested in an ISA, so no tax was payable on the capital gains or dividends. My brokerage account also allows me to reinvest dividends without a dealing cost.

In portfolio one, I kept the dividends as cash. In portfolio two, I reinvested all of the dividends and bought more shares instead.

Let’s take a look at the difference between the portfolios after 20 years.

Portfolio one

The final portfolio value after 20 years was £83,800, which is an impressive 738% return. Most importantly, the passive income I would have earned from dividends over the 20 years totaled £16,500. In the last year, the dividend received was £1,263, which is high considering the initial investment was only £10,000.

This shows the power of long-term investing and generating passive income over time.

Portfolio two

This time, instead of taking the dividends I earned as income, I reinvested them back into the portfolio. I can set my brokerage account up to buy more shares in the company that’s paying me a dividend. This means I’d have more shares in the following year, and then a bigger dividend income.

The final portfolio value is much bigger at £121,000, which is a return of 1,110% due to reinvesting my dividends.

The difference here, though, is that I wouldn’t have received £16,500 in passive income over the 20 years as it was all reinvested back into buying more shares.

But what about if I stopped reinvesting the dividends in year 21, and took the dividends from that point on as passive income?

For the first portfolio, my dividend income in year 21 would be £1,327. That’s still a respectable passive income.

For the second portfolio though, because of the additional shares I bought over the 20 years, the income would be £2,433. This is nearly double the passive income I would achieve in the first portfolio.

Risks to consider

The purpose here was to demonstrate why I reinvest my dividends. However, the assumptions were an ideal situation. Stock markets do generally rise over time, and companies are known to pay dividend yields of 5% or more. But this is never guaranteed. Stock markets can crash, and it makes long-term investing difficult when they do. Dividends are never guaranteed either, so this is something else to consider.

But taking it all into account, if I’m able to stick to my plan of dividend reinvestment, then I may have an even bigger passive income stream in retirement.

Views expressed 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.

A stock market crash is still a possibility in the weeks or months ahead. Equities might be characterised as being between a rock and a hard place: if an increase in Covid restrictions doesn’t shock the markets, then maybe an interest rate rise will. Both are possible in 2022.

Despite this uncertainty, for my portfolio, I still want to be in equities as there are few alternatives that can help me earn a decent return.

High-dividend shares as protection

I’m looking for an investment that pays a good dividend yield. Not only will I enjoy a passive income from the dividend streams, but I hope to benefit from resilience in case of a market sell-off.

I believe that high-dividend-paying shares should offer some good protection in case of a stock market crash. In many cases, stocks with a high dividend yield could be less volatile than other stocks. Investors may hold on to them for the income stream instead of selling when the market declines.

The ETF

I could pick individual shares, but for my portfolio, I’ve always preferred ETFs (exchange traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies via a single fund and are usually low-cost.

The one I’m considering is iShares FTSE UK Dividend UCTIS ETF (LSE: IUKD). This ETF aims to replicate the return of the FTSE UK Dividend + Index by investing in the 50 companies with the highest dividend yields in the FTSE 350.

It has a low expense ratio of 0.4%, a good trading volume and it’s one of the largest ETFs in this category.

The dividend yield is attractive at 5.76% and diversification is good.

The fund is comprised of 50 companies across several industry sectors, which should provide resilience in case any individual firm falters. A 5% size cap reduces the risk of any single company being overweight in the fund.

Is there a downside?

Despite the positives, I’m aware of the risks. One risk in particular, is the dividend trap. This is where the dividend is just not sustainable because the underlying business is not good.

Some high-dividend-paying companies will be established, successful firms that are great at generating free cash flows. However, some will feel they have to maintain high dividends to keep their investors happy when the underlying business is in difficulty. In the long run, the value of these companies is likely to fall. This could hurt the ETF’s long-term performance.

However, if there’s going to be a stock market crash then I believe diversification is going to be important to my portfolio. A dividend-paying exchange traded fund like this may be a good addition to my holdings and I’m going to seriously consider it.

Niki Jerath does not own shares in iShares FTSE Dividend UCTIS ETF. The Motley Fool UK has no position in any of the shares mentioned. 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.

The Deliveroo (LSE: ROO) share price has plunged around 40% since the middle of August. The sell-off has accelerated in the past few weeks, with the stock off 25% since the end of November. The shares have declined by 19% since the firm’s IPO at the end of March. 

I have previously said that I would buy the stock considering its growth potential over the next few years. However, following recent developments, which have pushed the share price lower, I am started to change my opinion.

Changing regulations

In the past few weeks, regulators have started to turn up the heat on so-called gig economy businesses. 

Ridesharing company Uber has lost several significant court cases here in the UK over worker rights. Meanwhile, in Europe, regulators have proposed changes that would influence the categorisation of workers. 

Under the proposals, companies may have to reclassify some of their workers as employees if platforms determine their pay and meet several other criteria. These include setting conduct rules, appearance standards and supervising work through electronic means.

A platform will be considered an employer if it meets two criteria. 

Deliveroo and many of its peers will almost certainly fall foul of these new rules. The overall impact the changes will have on the company is not yet clear, but it seems likely that costs will increase. For a corporation already struggling to earn a profit, this will set the business back significantly. 

That said, I think the company and its peers will likely find a way around these new rules.

If the cost of employing staff rises, the company will just increase costs to consumers. It could also look to streamline the business model and employ staff on full-time contracts. This is something the company’s peer, Just Eat, is already doing in the UK. 

Deliveroo share price risks 

As such, I do not think these changes will be terminal for the enterprise. I think they will force the group to change its ways and may delay profitability. 

Still, if the company is forced to put up prices, customers could start to move away from its platforms. I think this is the most considerable risk the corporation is facing today.

Nevertheless, I am encouraged by the fact that the consumers who flocked to the platform in the pandemic have, for the most part, stayed. This suggests to me that customers may be stickier than other business models. 

Despite this fact, I am no longer bullish on the Deliveroo share price. With risks mounting, I am not a buyer of the stock today. And if I owned the shares, I would be selling.

I think the group will encounter some severe headwinds over the next few years, which will be challenging to navigate and may cost the company a significant amount of cash. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc and Just Eat Takeaway.com N.V. 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.

The high cost of modern living means it’s sometimes hard to save for retirement. Things are particularly challenging right now as soaring energy prices and supply chain issues push prices of everyday objects through the roof.

Getting the money together to save in a cash account or invest in something like UK shares is difficult.

The latest consumer price inflation (CPI) reading in the UK showed prices rising at their fastest pace in a decade. Senior Bank of England officials reckon CPI will move above 5% next spring too, putting even more pressure on people’s saving power.

7 out of 10 aren’t saving enough!

A report by financial services giant deVere Group reveals how unprepared many Britons are right now for retirement. It says that 70% of clients it took on in 2020 were not saving enough to be able to have the same sort of lifestyle in retirement that they have currently.

Nigel Green, CEO of deVere Group, described the shortfall as “concerning for many reasons including because we’re living longer, meaning the money we save throughout our working lives has to last longer.”

He added: “It’s unlikely that governments will be in a position to support older people like they have done for previous generations,” while the “ballooning” deficits of many company pension schemes adds an extra risk for retirees.

Why UK shares could be the answer

This all means that, as someone who’s looking to live a comfortable lifestyle in retirement, it’s imperative that I find the best way to use the money I can save each month.

I’ve chosen to park my extra cash in UK shares because of the decent rates of return I can expect. Even taking into account stock market crashes, studies show that, over the long term, stock investing tends to generate an average annual return of 8%.

This figure means that even those who are late to the investing party can expect to make a fatty sum to help them in retirement.

Let’s say I was to invest £500 in UK shares at the age of 50. By the time I reached my State Pension age of 67 there’s a good chance I’d have made a healthy £209,823 to fund my post-work lifestyle.

2 FTSE 100 shares I’m thinking of buying

This is why I continue to buy UK shares for my Stocks and Shares ISA. I don’t think I can afford not to, given the uncertainty over the State Pension and those other dangers deVere mentions.

Reckitt is a FTSE 100 share I’m thinking of buying. It has a massive range of much-loved products in food and personal care that it sells across various markets. This gives it enormous strength and great profits opportunities, despite the issue of rising costs.

I’m also considering buying SSE today. I believe its focus on renewable energy should deliver great returns as the green revolution accelerates. That’s even though power generation problems are a constant threat that could take a bite out of earnings. 

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Reckitt plc. 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.