I have to admit I am getting a sense of deja-vu writing this article. Here’s why. Just yesterday, I wrote about the FTSE 100 housebuilder Persimmon, which looks cheap to me and also has a good dividend yield. The same is true for the FTSE 250 real estate company Vistry Group (LSE: VTY), which released its results yesterday. 

Strong results for Vistry Group

The company’s revenue increased by a solid 30% in 2021 from the year before. Its earnings per share (EPS) rose up by an eye-watering 229%! And its net cash rose even more, by almost 516%. Of course some of this is because of the correction in 2020 on account of the pandemic. Clearly, its earnings and cash position have benefited from a low base effect. But that still does not explain its revenues, which rose by a huge 60% in 2020. Vistry Group is evidently doing something right.

Sustainable dividend yield

Considering how good the year has been for Vistry, it is little surprise that the housebuilder also increased its dividend to 60p in 2021, up by three times from 2020. This brings its dividend yield to 6%, which is significantly higher than the 2.4% average yield for FTSE 250. Importantly, it is also higher than the average expected inflation rate of 4% for 2022. In other words, I can expect a positive real yield from the stock.

In fact, it is possible that if I buy the stock today, I might end up with an even higher yield this year. This is because the company is positive on its future earnings, which could spill over into bigger dividend payouts. While it does not provide a number in its outlook, it does expect to “deliver a significant step up in profits and returns in 2022”.

Cheap FTSE 250 stock

And yet, the stock has a relatively low market valuation, in my view. At 8.6 times, after its latest results, its price-to-earnings (P/E) is likely to rise significantly higher in anticipation of higher earnings. Actually, this is my perspective on almost the entire FTSE listed real estate set. While it saw a big rise as the government stimulus boosted the real estate market during the pandemic, it has over-corrected. This is evident in the fact that these stocks’ prices are now trading below pre-pandemic levels. In the case of Vistry Group, the share price is around 50% lower! And this is when its latest profits have far surpassed pre-pandemic levels. 

What I’d do

So far, economic growth is good too, so I expect that its performance should be positive, as it expects as well. Of course, with a war going on in Europe, I am keeping my fingers crossed, but so far my investing decisions are not based on geopolitical risks. I’d buy this FTSE 250 stock right away.

Manika Premsingh owns Persimmon. 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.

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Warren Buffett is used to investing millions of pounds at a time in the stock market. Most of us do not have that privilege. But I think the Warren Buffett method can still be helpful for me even if I am investing much less.

Here is how I would use £100 a month based on lessons from Buffett.

How Buffett started small

Buffett’s method has changed over the course of a very long career. He first bought shares 80 years ago. In his recent Berkshire Hathaway shareholders’ letter he reminisced that he “purchased three shares of Cities Services preferred stock. Their cost was $114.75 and required all of my savings.”

Nowadays, Buffett never concentrates his portfolio in a single share. In an early sign of his stock picking skill, Cities Services thrived and is still in business today as Citgo. But some of Buffett’s investments have turned out terribly. So if investing a small amount, I would follow the Buffett of today — not the Buffett of decades years ago. In other words, I would spread my money over a variety of shares. One way to do that – indeed the way Buffett reckons makes sense for most small investors – would simply be to buy a low-cost fund that tracked a key index like the FTSE 100.

Alternatively, I could use the £100 a month to buy the shares of individual companies. But to do that I would first save it up for a few months before buying. That would give me enough money to be able to diversify, and might also help me reduce the impact of minimum share-dealing charges on my purchase.

Warren Buffett on research

That would also give me time to do research on finding shares that are a good fit for my investment objectives and risk profile.

Buffett takes research very seriously. In fact, it is probably the single biggest part of his typical working day. He has said of his daily routine: “I just sit in my office and read all day.”     

Why does Buffett read so much and what has it go to do with his successful track record of picking shares? Companies listed on a stock exchange need to publish certain information on a regular basis, such as their annual accounts. This may not give a full picture of a company’s past performance or future prospects – but it can help me build a detailed view of it. That can help me identify shares that I think may be significantly undervalued compared to their long-term earnings potential, the same way Buffett does.

The power of consistency

Whether using £100 a month or much greater sums, Warren Buffett has developed a clear, consistent investment strategy. I think that can work as well with small sums of money as with much larger ones.

Buffett focuses on finding companies with compelling long-term business prospects trading at an attractive price. That enables him to invest money in them and hopefully benefit from their success. Even with £100 a month, if I can find the right shares to buy, I hope I can do the same.

Christopher Ruane 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.

Despite posting a reasonable set of results last week, the Rolls-Royce (LSE: RR) share price remains under pressure. It is now down 16% in a week and is back in penny stock territory. Looking at a slightly longer time frame, if I removes the falls suffered over the last week, its share price has remained flat over the past year.

Although I have long been an admirer of this British engineering icon, I am yet to be convinced that it makes a worthy addition to my portfolio. The question for me is what, if anything, would make me change my mind?

A long road to recovery

Compared to the horror show that was 2020, headline figures for 2021 were encouraging. Gross profit was £2bn and operating profit came in at £414m. Although free cash flow improved significantly, it still represented outflows from the business of £1.5bn.

In its largest division, civil aerospace, engine flying hours (EFH) rose 11% on 2020, but were still significantly below 2019. The company did, however, see a 57% rise year on year in EFH in the second half of 2021 as travel corridors reopened.

Despite these encouraging figures, it is becoming increasingly apparent to me that in order to secure its long-term future Rolls-Royce needs to diversify its business model. Relying on assumptions about when air travel will return to pre-Covid levels is not only dangerous, but a pointless exercise. The heightened geopolitical risks and inflationary pressures at the moment demonstrate that.

A new, leaner Rolls-Royce

The restructuring of the business with a far smaller footprint and leaner workforce has undoubtedly stopped the haemorrhaging of cash. I am also encouraged by the fact that defence and power systems now account for 60% of total revenues. Indeed, in 2021 power systems had a record order book. This is clear evidence that the business is beginning to pivot away from relying solely on EFH.

However, the really exciting parts of the business is its ‘new markets’ division. Composed of small modular reactors (SMR) and electrical, it estimates that these combined businesses could generate £5bn in revenue by 2030.

However, a great deal of uncertainty exists as to when these businesses will begin generating revenue for the group. Most of these technologies are still very much in their infancy. In this respect, it is acting more like a start-up than an established business as it attempts to paint a picture of the world of tomorrow for would-be investors.

In the more medium term, its most promising business is power systems. As the world transitions to a low-carbon economy, the shorter development cycles and established customer base provide a more concrete revenue estimate.

One of the key challenges the business faces is balancing investment in new markets while looking after existing business. After all, it needs revenues from its core business to fund all these new projects. However, it has one key competitive advantage and that is a decades-long record of innovation.

Despite the growing portfolio of opportunities, the investing world still pretty much sees Rolls-Royce as a manufacturer of aircraft engines that also maintains them. As long as that remains the case, its fortunes will continue to be tied to air travel demand. Therefore, I will not be investing yet, but it remains on my watchlist.

Andrew Mackie 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.

When I am looking for UK shares to buy for growth, I concentrate on companies that offer something special to their respective markets. I believe a unique competitive advantage is vital if a business is going to succeed in the long term.

There are not many of these opportunities on the London market. It takes a lot of time to uncover these world-beating companies, but I believe I have been able to isolate two potential opportunities. 

With that in mind, here are the two UK shares I would buy for growth today. 

UK shares for growth

The first company on my list is information technology (IT) infrastructure solutions provider Softcat (LSE: SCT). This business has grown at breakneck speed over the past few years. Since 2016 its earnings per share have grown at a compound annual rate of 24%.

As the world becomes more digitised, I expect the demand for this company’s services will continue to increase. As long as management continues to invest in the organisation’s capabilities and expand its footprint, I think the business can rise to the challenge.

That said, this is quite a competitive market. Softcat will need to keep investing and putting its customers first if the enterprise is going to remain a leader in this market. 

Even after taking this challenge into account, I believe it is one of the best UK shares to buy for growth. Considering its position in the market and potential for expansion over the next five to 10 years, I think the stock is undervalued. 

Building growth

I would also acquire Travis Perkins (LSE: TPK) for my portfolio. This distributor of building materials and products across the UK is not the only company in the sector, but it does have one of the most extensive footprints. This footprint gives the corporation substantial economies of scale. That means it can provide services and products to customers at a lower cost than many of its competitors. 

The business is currently having to deal with several challenges. These include the supply chain crisis and rising materials costs. These headwinds could have an impact on the company’s growth in the next few years as it works through the issues. 

Nevertheless, I believe Travis has the qualities required to pull through this uncertainty. It could even emerge stronger on the other side if its competitors start to struggle.

City analysts are forecasting a 40% expansion in the enterprise’s profits this year as it capitalises on the UK’s booming construction market.

Based on these projections, the shares are selling a forward price-to-earnings (P/E) multiple of 12.7. I think that looks cheap compared to the company’s growth potential. This is why it sits at the top of my list of the best UK shares to buy for growth today.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Softcat. 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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I want to boost my income and investing in dividend shares is one option I would consider. By owning shares that pay out dividends, hopefully I could start generating what are known as passive income streams – in other words, earnings for which I do not need to work.

How would I do this if I had no previous experience buying shares? Here is is one way I would go about it as I aim for passive income streams of £3,000 per year.

The link between income and yield

If starting with a target income in mind, it is important to understand the concept of yield. Just as an interest rate indicates how much income I would expect to receive on £100 of savings, yield shows the same for dividends. So a dividend yield of 5% means that if I owned £100 of shares in a company, I would expect £5 of dividend income per year from it.

Dividends are never guaranteed though, and a company can stop them at any time. So I do not see a company’s prospective dividend yield as offering me the certainty of return I would typically get from the interest rate on a savings account.

If I did invest in shares with an average yield of 5%, to target £3,000 of annual income I would need to invest £60,000. For a higher yield I would need less – if I invested £30,000 at an average 10% yield, I could hopefully target £3,000 of annual passive income. But higher yields can often indicate a higher risk.

Focus on quality

That is why I would not just look at a list of dividend shares and focus on those with the highest yields. Instead, I would try to find shares that I felt could sustain — and hopefully increase — their dividends over time.

So, for example, Guinness owner Diageo has a portfolio of premium drinks brands that give it pricing power. That can help it offset the potential profit impact of rising production costs as inflation hits. The company is highly cash generative, something that can help it pay consistent dividends. Indeed, it is one of a small number of UK shares that have seen their dividends increase annually for more than a quarter of a century. At the moment though, Diageo’s dividend yield is a modest 2%. So, while I could earn passive income from it, to aim for earnings of £3,000 a year just from Diageo shares would require me to invest £150,000.

Passive income from a diversified portfolio

But in reality, I would not invest my whole portfolio in one company. No matter how good it is, some unforeseen problem in its business could hurt its future ability to pay a dividend. Instead, I would spread my funds over a diversified group of shares and companies.

Some may have lower yields and some higher ones, but the average yield is what determines how much I need to invest to target £3,000 each year in passive income. However much I would need, if I do not have it today I could still start drip-feeding in a smaller amount. Even if I do not hit my £3,000 target straight away, I could hopefully build up to it over time as my funds allow.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo. 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.

Warren Buffett has — to my knowledge — never owned shares in International Consolidated Airlines Group  (LSE:IAG). But the Oracle of Omaha has some advice that I think is helpful when thinking about whether or not I should buy IAG shares. 

The business

The last few years have been tough for IAG. First there was the pandemic, which halted air travel across the globe. Then the awful Russian invasion of the Ukraine prompted Russia to ban UK airlines from travelling through its airspace. Today, the company finds itself with total debt that’s up 161% from 2019 and a share price that is the lowest it has been this calendar year. 

It’s not all bad news, though. The company reported a loss in 2021, but it expects to return to profitability in 2022. Bookings for this summer are up and the company is forecasting around 85% of its 2019 capacity to return this year, as long as there are no further political or pandemic-related disruptions. 

This means that there’s clearly reason to think that the worst is over for IAG and the airline sector. I think IAG also compares favourably with other airlines from an investment perspective. Its current interest payments account for around 4% of the operating income it generated in 2018. This compares favourably with EasyJet (25%) and Ryanair (11%).

Does this mean that I should buy IAG shares, though? As is so often the case, I find Warren Buffett’s advice on this subject helpful.

Buffett on airlines

In the 2007 letter to Berkshire Hathaway shareholders, Buffett made the following now-famous statement about airlines: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”

Buffett’s point here is that the airline industry as a whole is unattractive as an investment proposition.  The problem is a vicious cycle. First, airlines are in constant need of money. It takes a lot of money to run one, with costs including aircraft, servicing, landing fees, staff, and more. 

Second, they are unable to offer investors with an adequate return on their cash. Competition in the airline industry is ferocious and this results in extremely low prices. This means that airlines can’t generate enough cash to provide an adequate return to investors, which leaves them in need of further money and the cycle continues. This severely limits the attractiveness of IAG shares as an investment.

Conclusion

Airlines have had a difficult couple of years. But the worst seems to be behind them and I think this might have a positive impact on IAG shares over the next few months. As an investor, however, I’m looking for investments that I can hold for a longer duration. From this perspective, I don’t see IAG shares as attractive. If I were going to invest in an airline, it would be IAG. But I think that there are better opportunities in the market right now, so I’ll avoid the airline sector.

Stephen Wright owns Berkshire Hathaway (B shares). 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.