With the Stocks and Shares ISA 5 April deadline fast approaching, I have been looking for income stocks to buy for my portfolio. Three companies stand out to me right now as being undervalued income stars. 

Mining champion 

The first company on my list is mining group BHP (LSE: BHP). This firm recently announced a bumper set of results. Buoyed by rising commodity prices, the corporation announced a 61% increase in pre-tax profit for the six months to the end of December. 

Thanks to this growth, management has hiked the firm’s dividend to investors. After the recent increase, the shares support a dividend yield of 11.5%. 

Unfortunately, commodity prices are highly volatile, so BHP’s bumper profitability may not last forever. This is a significant risk I will be keeping in mind as we advance. If profits slump, the firm may have to slash its payout. 

Still, it looks to me as if high commodity prices are here to stay, at least for the next year or so. As such, I would buy BHP for my Stocks and Shares ISA today for its income credentials. 

Stocks and Shares ISA property buy

As well as BHP, I would also buy Big Yellow (LSE: BYG). The self-storage group might not offer a double-digit yield, but it does have a lot of growth potential, in my view.

Over the past 10 years, the firm has built a portfolio of self-storage facilities throughout the UK. And it is still creating new facilities. Demand for new storage facilities is running high, and Big Yellow is looking to capitalise on this potential. 

The one risk of this approach is that the company could end up overexpanding. If it invests too much and grows too far, too fast, shareholders could have to end up footing the bill. The firm might have to ask shareholders for cash to strengthen its balance sheet. 

Despite this risk, I believe the stock has a lot of income potential. At the time of writing, the shares offer a dividend yield of 2.9%.

However, this payout could grow if the firm’s earnings expand as it builds out the portfolio. There is also the potential for capital growth if the business’s growth plans yield favourable results. 

Leading income stock 

Financial services group Abrdn (LSE: ABDN) would also earn a place in my Stocks and Shares ISA portfolio. With a yield of 6.3% at the time of writing, the stock offers one of the highest yields in the FTSE 350. I am also attracted to the business as it has lots of growth potential over the next few years. 

The company is currently building out its investor offering by acquiring smaller wealth managers, and by buying online stockbroker Interactive Investor, Abrdn is trying to reach a new audience. 

This strategy could backfire. If it does, the firm could end up paying a lot of money for nothing. It may have to cut its dividend if the company ends up overexpanding. I will be keeping an eye on this risk factor going forward. 

Still, considering the group’s position in the market, reputation, and scope for growth during the next few years, I believe it deserves a place in my Stocks and Shares ISA. 

Rupert Hargreaves 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.

Right now, we’re seeing a huge shift in the stock market. With interest rates rising, investors all over the world are moving their money from ‘growth’ shares to ‘value’ shares. This shift is benefiting the UK market. That’s because the London Stock Exchange is home to many value stocks.

While there’s no guarantee value will continue to outperform growth, I like the idea of owning a few cheap stocks to capitalise on the rotation into the former. With that in mind, here’s a look at two UK value stocks I’d be happy to take small positions in today.

A dirt-cheap FTSE 100 stock

Let’s start with private equity and infrastructure investment firm 3i Group (LSE: III), which is a member of the FTSE 100 index. This stock looks very cheap right now. Currently, its forward-looking price-to-earnings (P/E) ratio is just 5.9.

I’m bullish on this value stock for a couple of reasons. Firstly, the company appears to have plenty of momentum right now. In a recent performance update, the group said it generated a total return of 33% from portfolios in the nine months to 31 December 2021. It also said it’s set for a “strong close” to its financial year ending 31 March 2022.

Secondly, in the second half of 2021, there were some big insider buys here from top-level executives within the company. Insiders only buy company stock for one reason – they expect it go up.

One risk to consider here is that revenues and profits can fluctuate. This can result in share price weakness at times.

Overall however, I think the risk/reward is attractive right now. The stock is cheap and there’s a dividend yield of around 3% on offer.

It’s worth noting that analysts at Barclays just raised their target price to 1,840p, which is nearly 40% above the current share price.

A value stock offering growth and dividends

Another UK value stock I’d snap up today is Hikma Pharmaceuticals (LSE: HIK). It’s an under-the-radar healthcare company that manufactures generic, branded, and injectable medicines. At present, the stock has a forward-looking P/E ratio of about 12.2, which is well below market average.

There’s a lot to like about Hikma, in my view. For starters, the company has a solid growth track record. Between 2015 and 2020, revenue climbed from $1.4bn to $2.3bn. For 2021, analysts expect revenue of $2.5bn.

Secondly, the company is very profitable (three-year average return on capital of 18%) and it has been growing its dividend at a very healthy rate in recent years. For 2021, analysts expect a payout of 53.5 cents per share, which equates to a yield of around 2% at the current share price.

A risk to consider is acquisitions. Hikma has made a number of them in the past and they haven’t always gone to plan. This could happen again.

I’m comfortable buying the stock at current levels however, as I think the low valuation provides a margin of safety.

And I’ll point out I’m not the only one who is bullish here. Last month, analysts at Peel Hunt upgraded the stock from ‘hold’ to ‘buy’, saying the generic medicine maker’s business and prospects are “under-appreciated” at its current share price.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Hikma Pharmaceuticals. 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.

Earlier this week, the Shopify (NYSE: SHOP) share price tanked after the company posted its Q4 earnings. It seems investors were unimpressed with the online shopping powerhouse’s guidance for 2022.

This is a stock I own, and after this week’s share price fall, I’m now sitting on a loss. This is quite frustrating, given that, at one point, I was up over 50% on my purchase price. So what’s the best move now with Shopify stock? Should I buy more, hold, or sell? Let’s take a look.

Shopify stock: what’s the best move now?

The first thing I want to know here is whether the growth story is still intact. And looking at the group’s Q4 results, I’m convinced it is.

For Q4, total revenue was $1.38bn, up 41% year-on-year and above the consensus forecast of $1.34bn. Within this, Subscription Solutions revenue grew 26% year-on-year while Merchant Solutions revenue was up 47% on a year ago.

Meanwhile, for 2021, total revenue for the full year was $4.6bn, an increase of 57% year-on-year, while gross merchandise value (GMV) was $175.4bn, an increase of 47% over 2020.

Looking ahead, Shopify said it doesn’t expect the same level of growth in 2022, due to the absence of lockdowns and government stimulus. However, it still expects ‘rapid’ growth that outpaces the general e-commerce market.

Overall, I’m comfortable with the growth here. I wouldn’t expect 2022 gains to be as high as they were during the pandemic when consumer behaviours changed dramatically.

Earnings growth

The next thing I want to know is whether the company is actually making any money. With interest rates rising, I think it’s likely to be a challenging year for companies losing a ton of money.

Shopify’s earnings for 2021 were quite encouraging to my mind. For the year, operating income was $268.6m (6% of revenue) versus $90.2m (3% of revenue) in 2020. Meanwhile, adjusted net income amounted to $6.41 per share versus $3.98 a year earlier.

This profits growth is encouraging. However, it’s worth noting that in Q4, adjusted net income per share ($1.36) was down on the figure posted for Q4 2020 ($1.58).

Valuation

Of course, I also want to look at the valuation. All of a sudden, valuations have become very important.

Shopify’s valuation is still quite high, even after the share price pullback. For 2022, analysts expect the company to post earnings per share of $6.52. That means the forward-looking P/E ratio is about 115.

This valuation does add considerable risk. If 2022 growth is disappointing, I’d expect the stock to be highly volatile.

Other risks to consider

And it’s worth pointing out that the valuation is not the only risk here. A slowdown in online shopping is another risk to consider. There’s no guarantee the e-commerce industry will do well after the pandemic.

Competition from rivals is also worth thinking about. Shopify rivals include the likes of Amazon, eBay, and Etsy. These companies could steal market share.

Shopify stock: my view now

Putting all this together, I see Shopify as a ‘speculative buy’ for me at the moment. It’s not a stock I’d load up on due to the fact that the valuation is so high. However, I’d be comfortable buying a small position at today’s share price as I think this company is likely to get bigger in the years ahead.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns shares in Amazon and Shopify. The Motley Fool UK has recommended Amazon, Etsy, and Shopify. 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.

Shares in video gaming platform company Roblox (NYSE: RBLX) are having a bad run this year. Earlier this week, the stock tanked after the company posted its Q4 2021 results.

I’ve been monitoring Roblox closely as I’m quite bullish on the video gaming market and it looks like it could be a major player in the metaverse. So has the recent share price fall provided an attractive entry point for me? Let’s take a look.

Why did Roblox stock fall?

Looking at the Q4 results, it’s not hard to see why Roblox stock tanked. For starters, both revenue and earnings missed Wall Street’s estimates.

For the quarter, revenue amounted to $770m, below the $772m analysts had been expecting. Meanwhile, the loss for the quarter of $0.25 was greater than the $0.13 loss expected.

Additionally, January 2022 bookings (equal to the amount of virtual currency purchased by users in a given period of time) were down significantly on recent monthly booking figures. For the month, bookings were between $220m and $223m, up just 2-3% year-on-year.

By contrast, in October, November and December, the company posted bookings growth of 15%, 23%, and 21% respectively.

This figure suggests the company is seeing a bit of a slowdown right now. That’s not so surprising though, given the world is reopening after the pandemic.

“Once stuck-inside kids and teens are now spending weekdays off their devices and out in the real world,” commented Jefferies’ analyst Andrew Uerkwitz.

The growth story is still in play

Stepping back a bit and looking at the bigger picture however, the growth story here appears to be intact.

For 2021, revenue increased 108% over fiscal year 2020 to $1.9bn, while bookings rose 45% year-on-year to $2.7bn. Net cash provided by operating activities jumped 26% to $659.1m.

And at the end of January, the company had daily active users (DAUs) of 54.7m, up 32% from January 2021.

“With nearly 55 million daily active users, Roblox is increasingly an integral part of people’s lives,” said CEO David Baszucki. “Our 2021 results demonstrate that the investments we were able to make in our technology and developer community are generating strong returns, and we will continue leaning into the business as we focus on the large, long-term growth opportunity ahead of us,” he added.

This is all quite encouraging, to my mind. However, it’s worth pointing out that Roblox is not expected to be profitable in the near term. For 2022, analysts expect the group to post a net loss of $365m. This adds risk to the investment case. Unprofitable company stocks can be highly volatile.

Valuation

As for the valuation, at the current share price Roblox has a market-cap of around $32.5bn. Given that analysts expect revenue of $3.31bn for 2022, that puts the price-to-sales ratio at just under 10.

That is high, which again adds risk. But I don’t think it’s outrageous, given Roblox’s huge user base and metaverse-related growth prospects. That valuation is not a deal-breaker for me.

My move now

Putting all this together, I see Roblox as a ‘speculative buy’ for me right now. But this is not a stock I’d load up on. However, given that the video gaming industry looks set for strong growth in the years ahead, I’d be comfortable taking a small position at the current share price.

Edward Sheldon 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.

Shares in fast-growing data analytics company Palantir (NYSE: PLTR) have underperformed this year. Yesterday, the stock took a big hit on the back of the company’s Q4 2021 results.

This is a company I’ve always thought looks quite interesting due to the fact that it has contracts with a number of government organisations including the FBI, CIA, and the UK’s NHS. Has the share price fall provided an attractive entry point for me? Let’s take a look.

Why did Palantir stock fall?

I can see why Palantir stock has fallen after the Q4 earnings. For starters, adjusted earnings per share for the quarter came in at two cents, well below Wall Street’s estimate for four cents.

Secondly, guidance for this year was a little disappointing. For 2022, the company expects an adjusted operating margin of 27%. That’s lower than 2021’s 31%.

Impressive growth

However, stepping back a bit and looking at the bigger picture, I think the results were pretty solid.

For Q4, total revenue grew 34% year-on-year to $433m. Within that, commercial revenue rose 47% year-on-year while government revenue grew 26% compared to a year ago. During the quarter, the company added 34 net new customers and closed 64 deals worth $1m, or more.

Meanwhile for 2021, total revenue jumped 41% year-on-year to $1.54bn, with commercial revenue and government revenue up 34% and 47% respectively.

And looking ahead, the company expects to keep growing at a healthy pace. Between now and 2025, it expects annual revenue growth of at least 30%.

These numbers suggest the growth story here is still very much intact.

PLTR: risk vs reward

Of course, as always, it comes down to risk versus reward. Is the valuation at a level where the stock’s risk/reward profile is attractive?

Well, assuming Palantir can generate 30% revenue growth in 2022, that would take its sales for the year to around $2bn. This means that at the current share price and market-cap ($28bn), the forward-looking price-to-sales ratio is around 14.

That is a little bit high for my liking, to be honest. Given the growth rate here, I’d prefer to pay a price-to-sales ratio closer to 10. The current valuation adds a bit of risk, in my view.

Another risk to consider here is Palantir’s reliance on large deals with a few customers. If one or more of these customers was to cancel its contract, revenue could take a hit.

An additional risk is lower-than-expected earnings. At present, Palantir aims to generate earnings per share of 20.5 cents for 2022 (this figure will probably fall after the recent guidance). However, the group may not achieve this if it is investing for growth in 2022. This could result in share price volatility.

My move now

Weighing everything up, I’m going to leave Palantir stock on my watchlist for now.

I think the stock is starting to look interesting after the recent share price fall. Growth is impressive and the company has a distinguished list of customers. However, given the valuation, the stock doesn’t make my ‘best stocks to buy now’ list.

Ed Sheldon 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.

With inflation wreaking havoc on profit margins, many investors are seeing their dividend income take a hit. But can Unilever (LSE:ULVR) shares be a safe-haven against the rising costs? Let’s take a closer look.

Over 20 years of dividends

As a reminder, Unilever is one of the UK’s leading consumer products companies. The business has 400 brands that can be found in almost any supermarket, including Hellman’s, Ben & Jerry’s, Dove, and Lipton, just to name a few.

This is actually what makes the company such a popular income stock among investors. Consumer products are hardly the highest growth area of the market and the 3.8% yield certainly isn’t earth-shattering. But the power of branding enables the group to charge a premium to customers and steadily raise prices in line with inflation.

This consistency is one of the primary reasons Unilever shares have delivered 20+ consecutive years of dividend growth. But can this trend continue?

Are Unilever shares poised for growth?

The company’s branding power is undoubtedly a powerful advantage. But it may not be as extensive as many believe. Looking at the 2022 guidance provided by management, it seems profit margins are expected to take a 1.4-2.4% hit this year.

With the cost of living expected to rise exponentially, it appears Unilever has decided to absorb some of the inflationary pressure to retain its customer base. After all, if consumers start looking to cut costs, premium products are usually first on the chopping block.

In my opinion, this move is necessary. However, thanks to a bit of restructuring, the business is expected to enjoy €600m (£500m) of annualised savings over the next two years. Meanwhile, if the current inflation rate is only transitory, margins are expected to be largely restored by 2023.

What’s more, Unilever just announced its plans to buy back €3bn (£2.5bn) of shares over the next two years as well. Generally, this is quite an encouraging sign as it demonstrates management’s faith in the firm’s financial and operational strength. That’s a key trait I like to see when picking dividend stocks for my portfolio.

Risks to consider

As encouraging as this guidance is, not all investors are happy with the strategy. Leading UK fund manager Terry Smith has been rather critical of the business for fixating on developing its public sustainability profile rather than focusing on improving fundamentals.

Having a robust public image can work wonders in attracting new customers. And even investors have become intrigued by this prospect with the rise of ESG investing. However, the evidence surrounding whether sustainable businesses drive superior financial performance is mixed. And, in some cases, it has actually harmed financial performance.

Needless to say, if Unilever ends up with the same fate, then its shares could suffer.

Should I buy Unilever shares?

While Smith may have a valid point, I’m cautiously optimistic about the future of Unilever shares and the dividend payout. Therefore, I am considering adding this business to my portfolio today, despite the risks.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

Dividend shares look particularly appealing right now. In times of political conflict and economic disruption, they can often provide some extra stability. That said, they’re not all the same and some offer more reliable dividends than others.

Let’s take a look at a couple of great dividend shares that I’m considering right now. The average FTSE 100 dividend yield is currently 3.3%. Although a share yielding 3% can provide some extra passive income, there are several shares that offer much more. 

Dial-a-dividend

For instance, telecoms provider Vodafone (LSE:VOD) currently yields 5.5%. But the dividend yield isn’t the only factor I’d consider. I’d also look at how sustainable it is. Can it afford it? For Vodafone, I’m confident it has sufficient cash flow to sustain the current level of payout. That’s because its dividend cover ratio of 1.1 suggests that it’ll earn more in earnings than it needs to pay out in dividends. Secondly, Vodafone has regularly paid dividends for almost three decades. It has a subscription-based business model that provides consistent cash flow. Looking forward, new technologies including 5G and Mobile-Edge Computing could create additional growth opportunities.

Debt pile alert

A word of warning though. The company has a substantial debt pile that totalled €41bn (£34bn) last year. It could face higher finance costs if interest rates move higher over the coming months or years. That could reduce earnings and raise the chance of cutting its dividend. Overall, I reckon it has solid financials that can sustain its dividend, so I’d consider buying the shares for my Stocks and Shares ISA.

Little-known dividend shares

Some of the shares that I find are relatively unknown. But that’s ok. As long as they display the characteristics that I’m looking for, I really don’t mind if they aren’t household names. After all, as an investor, I just want to grow my investments. One little known dividend share that I’d buy right now is Chesnara (LSE:CSN). This mid-cap firm is in the business of managing life and pension policies. It stood out to me for three main reasons: it has an attractive dividend yield of 7.5%; it has 17 years of dividend history with consistent growth in cash payouts; and it has a proven successful track record of buying life and pensions businesses.

Risks and benefits

At a time when I’d expect the Bank of England to raise interest rates to tackle persistently high inflation, it’s great to find shares that could actually benefit. Higher interest rates should generally be positive for Chesnara. That said, there are still risks on the horizon. Sharp moves in currency and financial markets can raise its risk exposure. A large spike in the level of claims could also do the same.

Overall though, I like what I see and would happily buy. Dividend shares that consistently pay over 7% for so many years are rare. So when I find them, I’m inclined to snap them up pretty quickly.

Harshil Patel has no position in any of the shares mentioned. The Motley Fool UK has recommended Chesnara 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.

I’m searching for the best cheap stocks that my money can buy right now. Here are two top shares (including one from the FTSE 100) I’m considering purchasing.

A top cyber security share

The amount that businesses, governments and other organisations are spend on cybersecurity is soaring. British government data released this week showed that 1,800 UK tech firms created total annual revenues of £10.1bn in 2021. This was up 14% year-on-year.

NCC Group (LSE: NCC) is one company that’s benefiting from this rapidly-expanding market. Latest financials showed revenues up 7.2% in the six months to November at constant currencies (and excluding its recent acquisition of Iron Mountain’s IPM business).

Cybersecurity-related expenditure isn’t just soaring in Britain, of course. Electronic attacks are a global problem and NCC’s broad geographic footprint is allowing it to exploit this booming market to the full. The e-warfare specialist operates in Europe, North America and Asia Pacific, and it’s taking steps to boost its overseas business too. Indeed, the $220m IPM acquisition last July gives it vastly better scale in North America.

A cheap UK tech stock

NCC provides a wide range of security and risk mitigation services to organisations. From providing protection from cyber attacks and security assessments to drawing up software escrow agreements, the tech giant’s operations are essential as the digital revolution takes off.

My only concern for NCC is the ever-present threat of systems failure. This could have a significant impact on the company’s reputation and by extension on future sales. That said, I still think this cheap UK stock’s low price makes it an attractive stock for me to buy.

City analysts think NCC’s earnings will rise 20% and 14% in the next two financial years (to May 2022 and 2023 respectively). As a result, the company trades on a price-to-earnings growth (PEG) ratio of just 0.8. Any reading below 1 suggests that a stock could be undervalued.

A FTSE 100 stock to buy

On paper it seems that Ferguson’s (LSE: FERG) shares also offer terrific value today. Forecasters think earnings at the plumbing, heating and air conditioning specialist will jump 20% this financial year (to July 2022) and by an extra 6% next year. This leaves it dealing on a forward PEG ratio of 0.9.

I like Ferguson as it generates 95% of its profits from the US. Its massive exposure to the world’s biggest economy could help it to generate large profits as the post-pandemic recovery continues. In particular, residential construction rates look set to rise strongly, while President Biden’s $550bn infrastructure spending bill could boost non-residential building too.

It’s worth remembering that rising interest rates could cause some turbulence for Ferguson’s profits. New housing projects dropped 4.1% in January, which some believe could reflect recent action by the Federal Reserve. That said, as a long-term investor I still think this FTSE 100 share has a lot to offer me. And especially as it rapidly grabs market share from its competitors.

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

It has often been said that imitation is the ultimate form of flattery. If that is the case, there is no greater flatterer of Warren Buffett than legendary Indian-American investor Monish Pabrai. He has become known in some circles as “the Oracle of Irvine” and just like his hero, the Oracle of Omaha, he has shown an almost clairvoyant ability to produce superior returns. In fact, a $100,000 investment in July 1999 in Pabrai Investment Funds (in fact, minimum investment is $2.5m) would have been worth $1.8m by March 2018. Pabrai is shameless about the fact that he has cloned Buffett’s approach almost to a tee. I will now shamelessly admit that I fully intend to clone his approach and will explain how. 

Say no to almost everything 

Like Buffett, Pabrai sifts through hundreds of companies at lightning speed. He often does this by reading annual reports and other financial information. Both of them are often looking for a reason to say no. Why? Because the type of company that would justify investment is an extraordinary business and there aren’t too many of those lying around. 

I try to search for companies that I believe have a durable competitive advantage in the long term. In other words, companies I believe will be around and thriving in the next 30 years. This is because my investment horizon, like Buffett’s or Pabrai’s, is for life. If I don’t think the business has that type of longevity, I steer clear.

“Heads, I win; tails, I don’t lose much“

This quote by Pabrai encapsulates a simple but profound idea: the price paid for the stock must be at such a large discount to the underlying value of the business that it provides a margin of safety. Simply put, I have become a bargain hunter. This is easier said than done in a world where hype drives some companies to insane valuations but it has been crucial to the success that Buffett and Pabrai have enjoyed. It also means a lot of waiting around because opportunities to buy great businesses for pence on the pound don’t come often.

Extreme concentration 

Charlie Munger once said that “a well-diversified portfolio needs just four stocks“. Munger is Buffett’s long-time partner and therefore also a hero of Pabrai’s by association. Pabrai has taken this advice quite literally. In 2015, half of his fund was in just two investments – General Motors and Fiat Chrysler warrants. When Fiat’s stock surged, he made seven times his money in six years.

It’s an extreme example but there’s a lesson here. The idea I’ve implemented from this is to focus on a few very good, intensely researched ideas. Diversification has been used with great effect by great investors such as Ray Dalio. Index funds offer great diversification too. However, when picking individual stocks, I’m searching for just a handful of the absolute best stocks. While I still hold a part of my portfolio in index funds, the part that consists of individual stock picks contains just six painstakingly researched businesses.

Stephen Bhasera 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 inflation concerns and the US tech crash, the FTSE 100 has risen 5.2% over the last six months. I think it is a good time to look at some UK dividend options to bolster my passive income portfolio. Although dividend payouts will not make me rich overnight, they could help fund my bills, which could increase by 7% come April.

Here I have picked two FTSE 100 shares from my watchlist as passive income plays with growth potential as well.

Real estate share with 9.5%+ yield!

Persimmon (LSE:PSN) is an FTSE 100 stalwart with a valuation of £7.8bn. And with the cyclical housing industry going through a period of high demand, the housebuilder’s business looks healthy right now.

Persimmon enjoyed a strong year financially. The full-year trading update showed a total group revenue of £3.61bn of which £3.45bn was from new home sales. The company operated with a margin of 28% across 2021. This was supported by the 3% increase in the average house prices in the UK.

Persimmon was able to navigate most supply chain disturbances and kept raw material and construction costs close to pre-pandemic levels while increasing home deliveries by 7% to 14,551 homes in 2021. The dividend yield was kept stable last year and could increase in the coming months if strong performances continue. To me, this is a sign of a healthy business capable of navigating very choppy waters.

However, the Bank of England (BoE) has already raised its base interest rates twice in 2022. The additional borrowing costs could put off new buyers, which is worrisome. As a result, the Persimmon share price is down 15.3% in the last six months.

But I think the current demand, Persimmon’s strong market position, and yield make it one of the best dividend stocks for my portfolio right now. I think the FTSE 100 company can add stability and value to my passive income portfolio over the next decade.

Insured income?

British insurer M&G (LSE:MNG) is my second FTSE 100 passive income pick right now. The company has been vocal about its focus on increasing its already huge yield of 8.5% every year.

Since its split from Prudential in 2019, M&G has been on an acquisition run. In fact, news broke today that the insurer will acquire investment manager TCF Investment to become a provider of model portfolio services that will help investors assess risk levels easier.

M&G’s half-yearly results (ended 30 June 2021) showed a marked growth in assets under management (AUM) that currently stands at £89.7bn. The revenue generated from subscriptions and transaction fees stood at £327m, up 6% compared to H1 2020.

The British insurance market is extremely competitive and M&G has a relatively small market share compared to giants like Legal & General. Also, the company posted a post-tax loss of £248m, attributed to fluctuations in the value of its assets.

However, this was offset by returns from its AUM wing, which put the business in a positive cash flow of £869m, on track to reach its target of £2.2bn by December 2022. I think this is a strong sign that dividends will increase if targets are met this year. And this is why I am considering this FTSE 100 share for my long-term passive income portfolio in 2022.

Suraj Radhakrishnan 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.