One of my favourite passive income ideas is investing in dividend shares. I like the fact that once I buy the shares, any income I receive really is passive. I do not need to do anything – I can just sit back and wait in the hope that passive income will continue coming in.

Here are three UK dividend shares I would consider buying for my portfolio at the moment, due to their passive income potential.

Passive income ideas: British American Tobacco

Cigarette maker British American Tobacco (LSE: BATS) boosted its annual dividend last week – as it has done for over 20 years in a row. Its business is in good shape. Not only is revenue growing, it has reduced the debt on its balance sheet. Indeed the company’s cash flows are so strong that it has restarted its share buyback programme.

The main appeal of British American Tobacco to me is its juicy dividend yield, which stands at 6.3%. To keep paying out its dividends, the company will need to continue generating the right level of cash flow. One risk to that is declining cigarette smoking rates in some markets. That could hurt both revenues and profits. However, for now at least the cigarette business remains huge – indeed, last year it actually showed a 4% revenue growth thanks in part to price rises. The company has also been aggressively developing its range of non-cigarette offering and now has over 18m customers of product lines such as vapour and modern oral.

M&G

Like British American Tobacco, investment manager M&G (LSE: MNG) is a member of the FTSE 100 index. It also has an attractive dividend. The yield is currently 8.5%. The company has said that it plans to maintain or grow its dividend in years to come, although the reality is that dividends are never guaranteed.

I like the fact that M&G has a well-established reputation and brand. That makes it easier and hopefully cheaper to attract and retain customers. The business model also lends itself well to generating cash to fund dividends, in my opinion. With huge amounts of money entrusted to it by clients – at the interim stage it reported £339bn of assets under management and administration – even a modest percentage fee can translate into sizeable profits. Nor is the company resting on its laurels. It announced this week that it is acquiring another investment management firm.

I do see some risk if the company fails to achieve suitably attractive returns for its clients. There was a net outflow of funds from the retail asset management division in the first half of the year, for example. Fewer funds under management could hurt profits.

Unilever

The third of the passive income ideas I would consider is consumer goods giant Unilever, the owner of iconic brands including Domestos and Marmite. The company yields 3.9% and pays out dividends quarterly.

Over the past couple of years, Unilever has stumbled slightly. There is a risk that cost inflation could hurt its profit margins. In its results last week, it revealed that its operating margin last year slid by 0.1%.

There was better news when it came to dividends, though, with the payout growing by 3%. I see Unilever as an attractive passive income idea for my portfolio, both now and hopefully in the future too.

Christopher Ruane owns shares in British American Tobacco and Unilever. The Motley Fool UK has recommended British American Tobacco and Unilever. 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.

There is always a good reason to research stocks that can earn me plump returns. But the reason is even bigger when I myself own the stock. Like the FTSE 250 investment platform CMC Markets (LSE: CMCX), which has a massive dividend yield of 11.2% right now. It rivals even the best of FTSE 100 yields.

What’s the catch with CMC Markets?

But here is the catch. The stock might have had a good run during the pandemic as savings rose and so did interest in investing. But that phase is long gone. After peaking in the six months ending September 2020, the company’s revenue and net profits declined through 2021. It even cut its profits expectations. And cut is dividends, which means that its yield could decline this year. It is little surprise then, that CMC Markets has seen its share price crash over the past year. It is now trading at half the levels it was at in early 2021. 

Dirt-cheap FTSE 250 stock

This declining share price has resulted in an abysmal price-to-earnings (P/E) ratio of sub-7 times. And the number looks even smaller when I consider its forward P/E, based on its earnings expectations for the next financial year, at around 2.5 times. Even considering the recent correction in its financials, it does not get more dirt-cheap than that, if you ask me. This is especially so considering that its prospects do not look bad at all. 

A few days ago, it released its latest trading update, which is succinct but quite illuminating in my view. It says that assets under administration for both its leveraged and non-leveraged businesses are close to record highs. This is an important statement because the company is mulling breaking up the businesses into two, which might well be beneficial to shareholders. The fact that they continue to be healthy is encouraging. I also like that the company follows up with the statement that “It is progressing well with its strategic initiatives, including the ongoing development of the UK non-leveraged investment platform”, which bodes well for the future. 

What I’d do now

In sum, what I am saying is this. The FTSE 250 stock has no doubt had a fall from grace recently. Its performance has softened, dividends have been cut and the share price has tumbled gloriously. Speculation of a splitting of the company into two parts could have added further to investor uncertainty about the stock. 

Yet, I believe that precisely because of these developments, there is a whole lot to like about CMC Markets now. Its share price decline means that its market valuation is at an unbelievably low number considering its earnings guidance for the next financial year. And it remains a profitable stock. Moreover, the split-up of the company might just be a good thing for shareholders — we will have to see. If I had not bought the stock already, I would definitely buy some of it now in anticipation of both growth and dividends in the future. 

Manika Premsingh owns CMC Markets. 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.

Putting together a portfolio of stocks for the first time can be a daunting experience. That’s because there are thousands of companies to potentially invest in.

If I was putting together a portfolio from scratch today, I’d start by selecting some rock-solid businesses to be the foundation of my portfolio. With that in mind, here are two stocks I’d go for.

This stock offers growth and resilience

One company I’d definitely invest in if I was starting out today is Microsoft (NASDAQ: MSFT). Listed in the US, it’s one of the world’s largest technology companies.

The reason I’d pick MSFT as a foundation stock is that the company is diversified in nature and has many growth drivers. One is the cloud computing market. This industry is expected to grow by nearly 20% over the next decade, which should benefit Microsoft as it’s currently the second-largest player in the industry.

Another growth driver is the expansion of the video gaming market. This industry is expected to grow by around 10% per year over the next decade. Microsoft is also a major player here due to the fact it owns Xbox and recently acquired Call of Duty publisher Activision Blizzard.

Microsoft is not just a growth play however. This company also has ‘defensive’ attributes. Not only does it have a strong balance sheet and high profit margins, but it also has many customers ‘locked in’. Businesses, for example, aren’t suddenly going to stop using Office if there’s a recession.

The downside to Microsoft is it’s not a cheap stock. Investors know this is a wonderful company, and it’s priced accordingly. Currently, the forward-looking P/E ratio is about 32, which adds a bit of risk.

A second risk I face as a UK investor is foreign exchange risk. If I was to buy shares today and the pound strengthened against the dollar, my investment would be worth less.

I’m comfortable with these risks however. I think this is a great stock to own for the long term.

The perfect core holding

Another stock I’d select if I was starting a portfolio from scratch today is Diageo (LSE: DGE). It’s a multinational alcoholic beverages company that owns a number of premium brands including Johnnie Walker and Tanqueray.

The reason I’d choose Diageo as a foundational stock is that the company looks well-positioned to benefit from a number of powerful trends in the years ahead. One such trend is ‘premiumisation’ – where consumers are willing to pay more for premium products. This is a major trend globally.

Rising levels of wealth is also a trend that could benefit Diageo. By 2030, millions more consumers in developing countries will be able to afford its products.

Like Microsoft, Diageo offers a nice mix of growth and defence. People tend to drink alcohol no matter what the economy is doing. This means the company is relatively recession proof.

One risk here though, is Covid-19 setbacks. If we see further lockdowns, Diageo’s sales from restaurants, pubs and bars are likely to take a hit. It’s worth noting that the stock’s valuation doesn’t leave much room for error. Right now, the P/E ratio is a relatively high 26.

I’m happy to pay a premium valuation however. To my mind, this stock is the perfect core holding.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Ed Sheldon owns shares in Diageo and Microsoft. The Motley Fool UK has recommended Diageo and Microsoft. 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.

I’m searching for some of the best dividend stocks to buy right now. Lets get straight down to it and talk about five top UK income shares on my watchlist. They’re listed in order of ascending yield. 

Tharisa (6% dividend yield)

Platinum group metals (PGM) producer Tharisa (LSE: THS) offers very attractive value for money in my opinion. On top of that huge dividend yield, this penny stock trades on a forward price-to-earnings (P/E) ratio of 4.8 times. This is comfortably inside the widely-regarded bargain watermark of 10 times and below.

I think Tharisa’s profits could soar in the short-to-medium term because of rising inflationary pressure. Safe-haven metals like platinum tend to increase in price when inflation reduces the intrinsic value of paper money. But this isn’t the chief reason I’d buy Tharisa stock. I think it’s a great company to own as demand for environmentally-friendly technologies rapidly grows.

PGMs are used in increasingly vast quantities inside catalytic converters to clean up exhaust emissions. They’re also a critical component in the electrolysis process that produces green hydrogen. This carries plenty of potential for Tharisa as the world moves gradually away from fossil fuels. I’d buy this dividend stock even though a fresh economic downturn could hit industrial demand for its product.

Central Asia Metals (6.5% dividend yield)

Investing in mining stocks can be a dangerous business. The process of metals excavation is highly complex and a variety of problems can occur to stop production. Exploration and development work isn’t an exact science either, and issues on either front can also hit earnings forecasts hard. Mining shares can therefore experience times of extreme share price turbulence.

I still believe, though, that Central Asia Metals (LSE: CAML) — like Tharisa — looks attractive from a risk-to-reward perspective. Today the copper, zinc and lead producer trades on a forward P/E ratio of just 6.5 times. I like this particular commodities stock because it produces metal in Kazakhstan, a region where the number of people living in urban areas is rising rapidly and therefore so is demand for construction materials.

I’d also buy this stock because the metals it produces are essential in the manufacture of electric cars. This UK mining share then could see profits soar as demand for these low-emissions vehicles grow. KPMG reckons electric cars will account for around half of all auto sales by 2030.

Direct Line Insurance Group (7.6% dividend yield)

I think Direct Line Insurance Group’s (LSE: DLG) one of the most dependable dividend stocks out there. It’s been proven that spending on general insurance products remains strong even during economic downturns. This is especially the case when it comes to motor insurance, of course, given that it’s a legal requirement for drivers.

The defensive nature of its operations provides Direct Line with excellent earnings visibility and consequently the means to pay big dividends year after year. But what’s so special about this particular insurance business? Well I like the excellent customer loyalty that its heavyweight brands like Direct Line, Churchill and Privilege command. They give the company a distinct advantage. That said, they don’t remove the threat posed by competitors and this is a risk I need to take into account. 

But Direct Line’s excellent cash generation makes it one of the best dividend stocks to buy right now in my view. Not only is this enabling the insurer to pay above-average yields and to engage in share buybacks. It is also helping it to invest in its core operations and in technology to deliver growth.

ContourGlobal (7.7% dividend yield)

Power generator ContourGlobal (LSE: GLO) has the wind in its sails at the moment. In December it upgraded its profits guidance for 2021 thanks to better-than-expected performance from one of its Spanish natural gas plants. I don’t think this dividend stock’s just a great buy for today, though. I reckon it’s a good way to make money from soaring energy consumption around the globe.

ContourGlobal builds and operates power stations across Europe, Africa and Latin America. Demand for its services should hopefully grow as population levels increase and economic output in emerging markets takes off. I also like this particular energy producer because of its growing focus on renewable energy. This could help its share price rise over the long term as the theme of responsible investing takes off. 

But I’m aware that today ContourGlobal trades on a high forward P/E ratio of around 29 times. A premium share price always leaves a company in danger of sinking if earnings forecasts start to look a bit flaky. A project delay is one danger that could send ContourGlobal’s share price reversing sharply.

Bank of Georgia Group (8.3% dividend yield)

Rising interest rates mean that it might be a good time for me to think about buying some banking stocks. A higher interest rate means that banks can generate greater profits from their lending activities. But I’m not thinking about buying Lloyds, Barclays or any other UK-focused bank. I’d much rather invest in Bank of Georgia Group (LSE: BGEO).

This isn’t just because Bank of Georgia’s yield smashes those of the FTSE 100 banks either. Banking product penetration in the Eurasian country remains quite low compared with the West. At the same time the Georgian economy is tipped to grow strongly along with personal wealth levels. It’s a blend that is already supercharging earnings growth at Bank of Georgia (profits have risen 67% during the past three years, for example).

Of course, growing political instability in former Soviet territories could damage Georgia’s economic growth. But it’s my opinion that this threat is largely reflected in Bank of Georgia’s super-low share price. Today it trades on a forward P/E ratio of just 4.3 times.

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

Buying penny stocks gives me an opportunity to own the growth heroes of tomorrow. As someone who invests with a long-term view, I’m happy to endure the temporary share price volatility that low-cost stocks like these often experience.

With some decent research I think I have a good chance of making terrific returns in the years ahead. Here are three top ‘nearly’ penny stocks I’m considering buying right now. As well as offering plenty of growth potential they also boast huge dividend yields north of 5%.

Greencoat UK Wind

Scores of UK shares face some significant damage to profits as the costs of Storm Eunice rack up. But other companies like Greencoat UK Wind stand to gain as record winds supercharged energy generation from wind turbines. On Friday morning, wind energy accounted for a whopping 42% of all electricity generation in Britain.

I’ve long argued that Greencoat, which owns dozens of onshore and offshore wind farms across England, Scotland, Wales and Northern Ireland, is a great dividend share to own. The wind farm owner will have a huge role to play in the transition to low-carbon electricity sources.

I’d buy it even though the threat of regulatory action to curb shareholder returns is a constant risk. Today, Greencoat sports a 5.4% dividend yield.

Bakkavor Group

It’s my opinion that food producer Bakkavor Group offers terrific all-round value. As well as carrying a 5.9% dividend yield, this ‘nearly’ penny stock also trades on a price-to-earnings (P/E) ratio of 10.8 times. These readings make it a top buy despite the threat that fresh profits-smacking lockdowns could cause if coronavirus infections soar again.

Bakkavor operates in the ‘food to go’ segment and watched revenues sink in 2020 as people stayed at home. Receding Covid-19 cases more recently however, suggest to me that the business could have turned the corner.

The ‘food on the move’ sector is tipped to grow strongly — in the UK it’ll be worth £22.6bn by 2024, according to Lumina Intelligence, up £7bn-plus from 2021’s anticipated levels. And Bakkavor should be well-placed to exploit this opportunity.

Impact Healthcare REIT

Cheap UK stock Impact Healthcare REIT looks set to benefit massively from Britain’s ageing population. The company operates 100-plus care homes in the UK and is rapidly expanding its estate to provide more space for elderly residents.

It’s currently in advanced discussions to acquire almost £70m worth of assets to keep its portfolio growing too, and has a medium-to-long-term pipeline above £290m.

I am concerned by the threat that changing social care policy could pose to Impact Healthcare REIT. Rising salaries for nurses also poses a danger as it threatens the profitability of the company’s tenants. But these are risks I’d be willing to accept given the company’s cheap share price.

Today, it trades on a forward P/E ratio of just 9.8 times. This, combined with the property giant’s 5.9% dividend yield, makes it a top value buy, in my opinion.

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

Plenty of high performing stocks are part of the FTSE 100 index. But not every stock is made equal. Some are definitely better buys than others and have managed to reward investors again and again. Like the the healthcare star AstraZeneca (LSE: AZN). If I had bought it 10 years ago, it would have tripled my money by now. 

AstraZeneca’s eye-watering valuation

I know that on the face of it, it comes with risks. A big one is its market valuation. I spend a fair bit of time researching cheap stocks, because they might just have the potential to rise significantly more than pricey ones. And by that argument, AstraZeneca should be an absolute no-go. Right now, it has an unbelievable price-to-earnings (P/E) ratio of 1,510 times as per my calculations based on its recently released full-year earnings report. The only other stock I have seen with such high valuations is Tesla, and there is no way I am about to buy it. 

Scratching the surface

If I dig deeper into this story, however, it turns out that AstraZeneca’s full-year 2021 P/E has risen to crazy levels only because of a massive fall in its reported earnings, which needs to be taken with a healthy measure of salt in my view. That is because the latest drop is driven partly by the company’s acquisition of US-based rare diseases’ focused company Alexion, a move whose potential impact I had wondered about earlier as well. It is also down because of items like restructuring, amortisation, and impairments. 

If I instead consider the core earnings measure, the number that removes the noise and focuses on the earnings from the main business, it is much healthier. And it gives me a P/E of 22 times, which I think is a truer reflection of the company’s valuation. The reported number is too much of an outlier in my view to give any real perspective!

What is really going on with this FTSE 100 stock?

At this valuation, AstraZeneca does not look terrible expensive to me. I mean it is not significantly higher than that for the FTSE 100 at 16 times. And this is a healthy defensive, with a good outlook for the current year. Speaking of its outlook, the company is optimistic despite the fact that its Covid-19 related numbers are expected to weaken as the pandemic’s grip wanes. Its crucial cancer treatments are likely to hold it in good stead over the foreseeable future. And it helps that it is adding to its portfolio of products, like through the acquisition of Alexion. 

I first bought the stock a few years ago, and occasionally buy it on dips even now. It has not disappointed me so far, I look forward to buying more of it in the near future. And holding it for a long time. Because I think it could triple my money over the next decade as well. 

Manika Premsingh owns AstraZeneca. 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.

One of the reasons many people decide not to start investing in shares just yet is because they want to wait until they have more money to invest. The logic is understandable: investing takes time and costs can eat into returns. Investing just a small amount of money can seem like more effort than it is worth.

But actually, I think the best way to start investing is with a fairly modest amount of money. That is why, if I had a choice between £50,000 and £500, I would rather begin my investing journey with just £500. Here is why.

Learning by doing

Before they start investing, many people think they could make great stock pickers. When it comes to putting hard cash into companies, though, things can be more complicated than they look from the comfort of an armchair.

Most people make mistakes when they start investing. For example, maybe they look at Vodafone’s earnings but do not think about its €44.3bn of net debt. Maybe they look at the Tate & Lyle sugar in their kitchen cupboard and fail to realise that it is not produced by the listed company Tate & Lyle. Maybe they look at Ferrexpo’s 12% yield and do not understand that it is funded by mining operations in Ukraine.

I think making mistakes can be an important part of learning as an investor. Some errors could actually turn out in my favour. But probably some mistakes will cost me dearly. If I start investing with £500, my education could come cheaper than if I begin investing with £50,000.

Focussed diversification, not money spraying

A key principle of risk management when investing is diversification. Nobody knows how a company will do in future. By spreading one’s investments across different companies, the risk to a portfolio from any one company is reduced.

The thing is, it can be hard to diversify with £500. Many stockbrokers charge a minimum fee for each transaction. So if I buy shares in lots of different companies, my £500 could largely be eaten up just in dealing fees.

That sounds like a bad thing – but I actually see a positive side. I would still want to diversify, even if only by putting £250 into each of two companies. But the limited diversification I could manage with £500 would motivate me to consider each investment very carefully. By contrast, with £50,000 I could easily spread the money across a couple of dozen companies. That would help me diversify – but I may pay less attention to the merits of each individual company.

By contrast, forcing myself to diversify with £500 could focus my mind on the quality of my investment choices more than if I had £50,000 to spray across a wide selection of shares.

How I would start investing

Of course I would like to be able to invest large sums in successful companies.

But that is not how I would choose to start investing. Instead, I would aim to begin on a relatively small scale. That way, I could focus on choosing just a few companies for my portfolio – and learn from my experiences with them.

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

I’m searching for the best FTSE 100 dividend stocks to buy. And in this article I’m looking at whether or not I should buy these cheap income shares.

Each carries a dividend yield above the average of 3.5% for the broader FTSE 100. They also trade on either a price-to-earnings (P/E) ratio of below 10 times or a price-to-earnings growth (PEG) ratio of under 1.

Betting on the post-Covid bounce

Property stock Land Securities Group (LSE: LAND) was rocked by the impact of Covid-19 lockdowns on its retail and office properties. But fans of the business would say that now’s a good time to invest as the threat posed by the pandemic seems to be receding. City brokers certainly expect earnings at the firm to keep rising over the next few years at least. And as a consequence dividends are expected to continue growing, resulting in a 4.5% dividend yield for this year alone.

I’m afraid to say I won’t be buying Land Securities shares despite this bright short-to-medium-term outlook. I worry about how demand for its shopping centre and office space will fare as the digital revolution clicks through the gears. E-commerce is having a devastating effect on physical retail and the rise of remote working is upending the role of the office too.

Land Securities is addressing this problem, for example, by changing its shopping malls into multi-use areas with a greater focus on leisure. But this is coming at great cost and there’s no guarantee that it will succeed in the online shopping age.

A better FTSE 100 dividend stock to buy?

Would I be better off buying shares in BT Group (LSE: BT-A) instead then? This Footsie stock’s forward yield sits at a less-impressive 3.9% for the current year, sure. However I think its essential role in the digital revolution could actually make it a long-term winner for me. The broadband, telephone, and mobile services it provides are critical in keeping people connected.

I also prefer BT Group over Land Securities as the rising costs of living hits consumer spending power. Recent research shows how people’s demand for telecoms products has been more resilient than say for essentials like clothing. The retailers that fill Land Securities’ properties are facing a more uncertain future and could struggle to pay their rents.

That being said, I don’t fancy buying BT’s shares for my portfolio either. I still think the outlook for the FTSE 100 telecoms company is packed with danger as the UK economy cools. I’m also worried about the rising level of competition it faces. It’s not only facing a fight to hang onto and to grow its household and business customers. The company’s Openreach fibre-laying infrastructure division also has a battle on its hands. Liberty Global and Telefonica are exploring setting up a joint venture to supply 7m British homes with their own fibre, for example.

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

After years of being unloved and unwanted, cheap FTSE 100 dividend stocks seem to be coming back into fashion. The market is calling this a “value rotation”. Today, I want to look at two lead index shares I’m considering for my portfolio in the hope that I can profit from this shift.

Old-school value: 8% dividend yield

What seems to be happening is that many high-flying tech stocks — some of which have never made a profit — are falling. At the same time, investors are showing fresh interest in old-school value stocks. These typically produce lots of spare cash, but are slow growers.

The first company I want to look at today is a classic value play, in my opinion. FTSE 100 stock Imperial Brands (LSE: IMB) is the world’s fourth largest tobacco company. Its flagship brands include JPS and Winston.

However, among investors, Imperial is known best for its high profit margins, strong cash generation and generous dividend.

Although chief executive Stefan Bomhard cut the dividend payout in 2020, Imperial Brands’ low share price means this share currently offers a dividend yield of 8%. This payout is comfortably covered by earnings, and I believe it should be sustainable.

Of course, there are some risks here. Imperial generates nearly three quarters of its profits in the USA, UK, Spain, Germany, and Australia. Smoking rates are generally in decline in Western markets. This means Imperial must fight for market share to stop its sales falling.

Further restrictions on tobacco sales are another risk, as is the growing trend among fund managers for avoiding the tobacco sector.

Even so, I reckon that Imperial shares are probably too cheap. With the share price at around 1,750p, IMB trades on just seven times forecast earnings and offers a giant 8% dividend yield. The shares are up nearly 8% so far this year and I think further gains are possible.

Activist pressure could lift this FTSE 100 share

Telecoms group Vodafone (LSE: VOD) is another stock that’s lagged the market in recent years. To be fair, I think some of this poor performance has been self-inflicted. Although I believe its boss Nick Read has done a good job of slimming down the business and releasing value, Vodafone just hasn’t been able to deliver any real growth.

One problem for Vodafone and its rivals is that the costs of building and maintaining networks is very high. At the same time, tough rules on competition mean that prices are kept low.

There’s a risk that this situation will continue, but I think things may be changing. Vodafone recently rejected an €11bn takeover offer for its Italian business, saying it was continuing to pursue “several” other consolidation opportunities in Europe.

Merging two major mobile networks should help to improve profit margins. My guess is this is one of the aims of activist investor Cevian Capital, which has been buying Vodafone shares.

Vodafone’s 5% dividend yield looks safe enough to me, as its backed by the group’s €5bn annual free cash flow. If Read can find a route back to growth, I think Vodafone’s share price could rise significantly from current levels.

Roland Head owns Imperial Brands. The Motley Fool UK has recommended Imperial Brands and Vodafone. 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.