Key points

• Electric aircraft and nuclear power could cause the Rolls-Royce share price to take off 
• With borders reopening, the firm will benefit from increased flying hours
• The recent sale of AirTanker Holdings for £189m will bolster the company’s balance sheet

The Rolls-Royce share price has taken a battering during the pandemic. But with innovation in electric flights and nuclear power, are things about to change for this industry giant? What’s more, the retreating pandemic may give rise to more flying globally. I’m looking at these two factors in detail, while wondering if I should add to my current holding of Rolls-Royce shares. 

Carbon ‘jet zero’ and nuclear power

The firm is at the forefront of global efforts to decarbonise. In November 2021, it tested its first electric aircraft in the UK. In the process, the plane broke two world speed records, as revealed last month. The records were broken for the average speed over 3km and 15km.

For me, this is extremely promising. If the company could harness the power of electricity for civil and defence aircraft, that would be truly revolutionary and the Rolls-Royce share price could soar. CEO Warren East used the phrase “jet zero” and its pursuit of electric flight would go some way to decarbonising the aviation industry.

Also, the firm announced the appointment of SNC-Lavalin to manage the next phase of its move into nuclear power just this month. SNC-Lavalin will manage the construction of several Small Modular Reactors (SMRs) around the UK.

The SMR project has already attracted the attention of the Qatari Sovereign Wealth Fund, which invested £85m in December 2021. This news resulted in a 10% upward move in the Rolls-Royce share price.

As part of a further effort by the company to decarbonise, the SMRs will produce energy equivalent to 150 wind turbines. Furthermore, they will occupy only 10% of the space of a traditional nuclear plant. This long-term plan should have the SMRs on the grid by 2030 and could be a major factor in a Rolls-Royce share price surge.

The Rolls-Royce share price and the pandemic recovery

With the pandemic receding, a number of countries are now considering fully reopening their borders. Just this week, Sweden announced its intention to open to EU citizens, regardless of vaccination status. We can also expect an update from the Swiss Federal Council on fully open borders. Of course, it’s always possible that a new variant may arise, causing progress in border openings to stall. This remains a major risk for the firm and its shares.

These moves could be very positive for the Rolls-Royce share price, because the firm is paid for every hour flown by aircraft using Rolls-Royce engines. British Airways has stated it will resume long-haul flights to Sydney via Singapore and Rolls is also hiring 280 new workers for its Singapore plant in order to ramp up engine production.

The very recent completion of the company’s 23.1% stake sale in AirTanker Holdings also provides £189m with which to bolster its balance sheet.

This is a company that’s innovative and looking far into the future. Its SMRs and potential electric aircraft could be nothing short of revolutionary. The reopening of borders may also cause the Rolls-Royce share price to soar. Will I be adding to my current holding of shares just now? Yes I will!

Andrew Woods owns shares in Rolls-Royce. 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.

Dividend shares can be a useful source of passive income. One thing I like about them is that they do not necessarily require a large initial investment to start generating income for me. If I had £500 to invest in dividend shares today, here are two I would consider buying.

Diversified Energy

The natural gas and oil well operator Diversified Energy (LSE: DEC) is not nearly as well-known as many energy giants. But a pleasant surprise about the company is its double-digit dividend yield. Currently, Diversified pays out a yield of 10.3%.

Its unconventional business model involves buying up wells that have already been operating for decades. Other companies may not think they are still economically viable. But by extending the operating life of such wells, Diversified hopes to keep making money and paying dividends. It pays quarterly, which is another attraction from a passive income perspective.

Such an approach is not without risk. Ultimately, the wells will need to be capped to stop future leaks once production ends. That can be costly. With over 60,000 wells in its portfolio, the expense could hurt profits at Diversified. Meanwhile, the estate of small wells helps Diversified pay an attractive dividend to shareholders. I would consider holding it in my portfolio.

Imperial Brands

Tobacco company Imperial Brands (LSE: IMB) owns a portfolio of products including John Player Special and West. Although declining cigarette consumption threatens revenue and profits, Imperial is trying to combat this risk by building market share in key countries. It is also developing non-cigarette products such as vaping. For now, the economics of that business remain far less attractive than cigarettes. But if that changes as it achieves critical mass, Imperial could be well-positioned to benefit thanks to its established brand portfolio.

After a big dividend cut in 2020, Imperial raised its payout last year, albeit only by 1%. Currently the yield is 7.7%. The shares have increased 20% in price over the past year, suggesting that investors may be attracted to the tobacco sector once more. If the share price keeps rising, the yield will fall. That is why I would consider adding more shares in Imperial to my portfolio today while the yield remains above 7%.

My move on these dividend shares

I would consider buying both of these dividend shares for my portfolio and holding them, waiting for the dividends to pile up. Dividends are never guaranteed, but I would get some diversification by splitting my £250 evenly across the two companies.

That could generate around £45 in passive income per year from my investment of £500. Both companies aim to increase their dividends, so the payout could rise over time, although there is no guarantee of that. But I already think £45 per year is a handsome reward for an investment of £500.

Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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 of Royal Mail (LSE:RMG) haven’t had a great run in 2022, so far. Despite delivering record growth throughout 2020 and 2021, this business has taken a bit of a tumble. But is this a sign of trouble ahead or a buying opportunity for my portfolio? Let’s explore.

Investigating the Royal Mail shares performance

The recent tumble came on the back of delivery delays as well as a mixed third-quarter trading update. On the one hand, domestic parcel revenue between October and December 2021 continued to surge by an impressive 43.9% versus pre-pandemic levels. On the other, it came in 4.9% lower than a year ago. However, I’m not too surprised, since 2020 was an exceptional year for e-commerce.

At the same time, performance from its GLS division continued to expand with a 5% increase in parcel volumes reaching 239 million during the quarter.

Unfortunately, this wasn’t enough to replace the 2020 surge in sales. And consequently, total revenue actually fell 2.4%. But again, it’s still 17.1% higher than pre-pandemic levels.

Meanwhile, the leadership team continues to restructure and streamline the business. It has announced plans to axe 700 managerial positions through the company. While this is undoubtedly unpleasant for the soon-to-be ex-employees, the move is expected to deliver £40m in annualised savings from 2023 onwards.

However, the cost of sacking a large number of employees is high – £70m in this case. And consequently, the business cut operating profit guidance from £500m to £430m. Needless to say, with revenue growth stagnating and forecasts being cut, the fall of Royal Mail shares is hardly a surprise.

A trap or buying opportunity?

Analysts from JP Morgan Cazenove recently cut their price forecast for Royal Mail shares by 7%. In fact, this appears to have been what triggered the start of the stock’s decline last month. Yet, even after the reduction, the target price is still 768p. By comparison, shares of Royal Mail are currently trading at around 444p, suggesting the market may have overacted to the news.

That certainly seems like a buying opportunity in my mind, especially considering the stock is currently trading at a price-to-earnings ratio of 5.1!

But as cheap as that seems, I have some concerns. With the cost of living on the rise, due to inflation, higher energy prices, and a national insurance tax hike, consumer spending could soon take a significant hit.

And as households aim to cut unnecessary costs, the volume of e-commerce orders could fall. That means fewer parcels to deliver and, in turn, less revenue for Royal Mail.

Personally, I think there are quite a few unknowns about the operating environment Royal Mail is entering. What’s more, these threats are largely out of management’s control – a bad trait in my experience. That’s why I see it as a trap rather than a bargain. And it’s why I’m not going to be adding any shares to my portfolio today, despite the seemingly low price.

Zaven Boyrazian 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.

According to Hargreaves Lansdown, Vodafone (LSE:VOD) is one of the most popular UK shares to buy at the moment, based on trading volume. And considering that even professional investors have been upping their stakes, this is hardly surprising. But does popularity mean it’s a good investment?

Let’s explore how this stock has performed over the last half-decade and what the future holds for this business.

Vodafone share performance

As I’ve said on numerous occasions, popularity is not a good indicator of a smart investment. And it seems Vodafone is no exception to this rule.

In February 2017, this stock was trading at 198p. Today, Vodafone shares are priced around 140p. That’s a 30% decline during a time in which the FTSE 100 index delivered returns of around 5%. Obviously, this isn’t a promising start.

However, does this story change when dividends are accounted for?  If I’d invested £1,000 into Vodafone five years ago, I’d have 505 shares in my portfolio, ignoring any commission fees. Assuming I didn’t increase or reduce my position during this time, my investment would have generated £149.92 in dividends.

That means the dividend-adjusted value of my investment today would be £849.92, or a loss of 15%. That’s not great. And when taking the average annual 2.5% inflation rate into account during that period, the loss is only magnified.

What happened? And could the future be brighter for the telecommunications giant?

Investigating the problems and potential

There are undoubtedly many factors contributing to the group’s decline. But regardless of the catalysts, the end result has been a shrinking top line with unstable earnings and a rising debt problem. That certainly doesn’t help explain the popularity surrounding this business. But is that about to change?

Looking at the latest trading update, revenue is climbing once again by a grand total of 4.3%. That’s hardly anything to get excited about, but after five years of revenue decline, it’s certainly a welcoming sight. So what’s behind this growth?

Looking deeper into the numbers, Vodafone has managed to expand its customer base throughout Europe while reducing the churn rate from 15% to 13.7%. However, what I find more exciting is the progress made in Africa.

As of the end of 2021, the company served 187.8 million customers in that region, 51.3 million of which are M-Pesa users. As a reminder, M-Pesa is a payment network used by African businesses to accept digital payments even on non-smartphone devices. And in the three months leading up to December, 5.3 billion transactions moved through the network – a 26% increase.

Today, the group’s operations in Africa only represent a small portion of the overall revenue stream. But it has been steadily expanding over the years and could provide a strong growth catalyst for Vodafone shares in the future.

Time to buy?

While the income statement might be improving, the balance sheet has a long way to go. Today, the firm has around €69.5bn (£58.6bn) of outstanding loan obligations. With interest rates on the rise, profit margins will undoubtedly get squeezed.

That’s why, personally, I’m not interested in buying Vodafone shares today, despite their popularity.

Zaven Boyrazian 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.

The rising cost of materials is something investors in housebuilding shares need to keep a close eye on. Personally speaking however, these pressures aren’t denting my fondness for these sort of cheap stocks.

Latest financials from Redrow (LSE: RDW) illustrate how — for the time being at least — the housebuilders remain well-placed to absorb these costs and to continue generating decent profits

In its half-year update, Redrow said today that “house price inflation continues to exceed build cost inflation”. In fact homes are rising at such breakneck pace that margins have returned to pre-pandemic levels a full year ahead of Redrow’s expectations. Operating margins increased 2.4% year-on-year during the 27 weeks to 2 January, it said, to 19.5%.

Redrow’s revenues meanwhile clocked in at a first-half record of £1.05bn, up £11m from the same 2021 period. And pre-tax profits leapt £29m year-on-year to £203m.  The strong result has prompted Redrow to hike the interim dividend to 10p per share, from 6p last year.

2024 forecasts raised

Pleasingly, it seems as if the party isn’t over for Redrow either. The builder’s order book stood at a whopping £1.5bn as of 2 January, up £200m from the same point in 2021. In addition, the value of Redrow’s product has also continued to rise rapidly since the start of the second half.

The value of private reservations per outlet per week averaged £417,000 in the five weeks to 6 February (or £367,000, excluding a bulk deal in London), it said. This was up considerably from the average value of £301,000 registered a year ago.

As a long-term investor, I always look beyond the short-term when considering which UK shares to buy. So I’m pleased to hear that Redrow has hiked its forecasts for the financial year after next (ending June 2024) today too. The housebuilder expects to generate revenues of £2.3bn-£2.4bn then, up from a previous forecast of above £2.2bn.

Returning to my point at the top of the piece, Redrow also expects house price inflation to continue outpacing build cost inflation. It has thus lifted its operating margin estimate to between 19.5% and 20% from around 19.5% previously. This has led Redrow to lift its earnings per share forecasts as well, to 92p per share, from 90p.

A cheap stock with 5% yields!

I expect housebuilding shares to remain a lucrative asset class for years to come. It’s why I already own FTSE 100 shares Barratt and Taylor Wimpey in my portfolio today.

I’m expecting demand to continue exceeding homes supply as interest rates should still remain well below their historical norms. New buyer incentive programmes should also continue to help first-time buyers continue to get their foot on the property ladder when Help to Buy ends next year.

I’m thinking of buying Redrow too, given the exceptional value it currently offers. This cheap UK share trades on a forward P/E ratio of 6.9 times. It also carries a large 5% dividend yield.

However, the problem of rising costs isn’t likely to go away soon. And its one I’ll continue to monitor closely. But all things considered, I think the likes of Redrow should continue to deliver delicious shareholder returns.

Royston Wild owns Barratt Developments and Taylor Wimpey. The Motley Fool UK has recommended Redrow. 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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The Scottish Mortgage Investment Trust (LSE: SMT) share price rallied 105% in 2020 and has also been a top FTSE 100 performer over the past 10 years – up nearly 700% during that period. Yet recently the stock’s price has declined and is down 14% year-to-date.

So, after a dent in its previous impressive form, does this recent fall present me with an opportunity for me to buy? Or should I be steering clear of adding SMT to my portfolio? Let’s take a look.

SMT share price fall

Let’s begin by looking at why the trust’s share price has taken such a hit recently. One factor it can be attributed to is rising interest rates. As my colleague Andrew Mackie highlighted, interest rates have slowly begun to creep up again after they were slashed near zero during the pandemic. And this, along with soaring inflation, has had a direct impact on SMT due to its heavy exposure to unlisted and growth stocks.

As these companies tend to be indebted in order to fuel growth, rising interest rates mean these debts will become more difficult to handle. As such, in times like these investors tend to put their money into value stocks. 

A further reason for the fall is SMT’s tech-heavy weighting. With its top 10 holdings including ASML, Nvidia, and NIO, this means that when tech companies are doing well (as they were), the Scottish Mortgage share price rises. However, the recent tech sell-off means that these stocks have tumbled in price, reflected in the drop off the SMT share price, highlighting the negative connotations that can exist with its large exposure to the sector.

Long-term outlook

However, there are factors that excite me when looking at SMT. One reason I would consider adding SMT to my portfolio is its long-term outlook. The fund managers aim to beat the FTSE All-World Index over a five-year rolling period, and its history clearly shows that SMT can do so. For comparison, the Scottish Mortgage share price is up over 220% in the last five years, while the FTSE 100 has managed just 5%. Given this, the current dip could just be short-term volatility, therefore presenting me with a good opportunity to buy some shares at a reduced price.

Further, while many of SMT’s big holdings are tech stocks, the trust does allow me to enjoy exposure to an array of sectors within a single investment. For example, another one of its top holdings (8.1%) is pharmaceutical stock Moderna, best-known for its Covid-19 vaccine. 

It also provides further diversification through its global investment strategy, an example being its weighting in China. And for me, this is an attractive factor.

Should I buy?

So will I buy? Well, this depends. If I was considering adding SMT to my portfolio for a shorter timeframe than five years – then no. However, as a long-term investor, I think SMT at its current price could be a solid addition to my portfolio. The trust has a proven track record, and the manager’s long-term outlook is one that clearly bears fruit. Even though SMT is experiencing a volatile period, I would look to add some shares to my portfolio today.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding. 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 stocks can be an excellent source of passive income, but which are the best ones to buy now? After all, not all income investments work out. The gains can be quickly eliminated if the share price falls. And if dividends get cut by management, then investors can be left owning a business that doesn’t generate much income.

With that in mind, let’s explore two dividend stocks with exceptionally high yields that I think have plenty of long-term potential.

Profiting from inflation

For most consumers and companies alike, inflation sucks. The increased cost of living typically results in lower consumer spending that can impact individual businesses as well as wider economic growth. However, there are a select number of sectors that can drastically profit from the situation.

The industry that’s currently at the top of my list is mining. Extracting metals from the ground is primarily a fixed-cost process. So, when inflation pushes up commodity prices, the profit margins of these businesses can expand drastically.

Both Rio Tinto (LSE:RIO) and BHP Group (LSE:BHP) have already begun reaping the benefits. While inflation has only recently started entering the picture, both of these businesses have enjoyed tailwinds thanks to the surging demand for battery and renewable energy metals over the last two years. 

Looking at the interim results for both firms ending in June 2021, net income exploded by 271% and 140%, respectively. So, it’s not surprising that the dividend payout followed suit, and now both stocks offer a yield of around 8.6%!

With inflation pushing prices even higher, these dividends may continue to expand for the foreseeable future. Does that make these stocks the best dividend investment today? Possibly, but it’s not without its risks.

Even the best dividend stocks have risks

As impressive as the passive income-generating capabilities of these dividend stocks might be, they’re ultimately driven by metal prices. And since these are set by the market rather than the business, there is virtually no recourse available for management to counter falling metal prices.

At the moment, commodities are on the rise. But the higher prices haven’t gone unnoticed. As other mining businesses enter the arena to capitalise on the opportunity, global supply may eventually outweigh demand. In that scenario, prices will naturally start to decline, potentially jeopardising the dividend yield as well as sending these stocks in the wrong direction.

The bottom line

Personally, I feel the potential reward is worth the risk. The world is shifting towards electric vehicles and renewable energy technologies. Therefore the need for precious metals like copper, lithium and nickel mined by these businesses isn’t likely to disappear any time soon. At least, that’s what I think.

Combining this with their established mining portfolios and decades of expertise makes me believe these could be the best dividend stocks to add to my portfolio today.

Zaven Boyrazian 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.

If I could generate a decent amount of passive income each month, that could relieve some of the financial pressure of my daily life. Even if it was not enough to substitute for a working salary, at least it could come in handy for paying bills, funding some luxuries and having some extra cash on hand.

One of my favourite passive income ideas is investing in shares that pay me dividends. Here is how I would build a dividend share portfolio with the target of earning £500 each month in passive income.

Dividend shares as passive income ideas

Shares can sometimes seem a bit complicated to people who have never owned them. But basically, a share is what the name suggests: a tiny sliver of a company. So, for example, imagine I buy shares in BP or HSBC. If they make a profit and divide it between shareholders, I will typically be entitled to some of it.

So, I could get some of the benefit of the hard work of BP or HSBC. But instead of going to work at the company each day and earning a wage, I simply use my money to buy some shares in it. The income I get is in the form of dividends. These are never guaranteed, so I would buy dividend shares in different companies operating across a variety of industries. That way, if one does not do as well as I expect, it would only be a small part of my overall portfolio.

Targeting a specific passive income

My target of £500 each month adds up to £6,000 per year in passive income. If I could buy shares paying 10% of their cost in dividends – what we call the ‘yield’ – that would mean I’d need to invest £60,000.

In practice, 10% yields are unusual. Such a high yield can suggest a heightened risk at a company, for example because its profits are seen as difficult to sustain in future. But a 5% yield is available from quite a few FTSE 100 shares. That would require me to put in £120,000 to aim for £500 a month in passive income.

I could do this in a couple of ways. One option would be to put a lump sum of capital into my portfolio today and then hope to start earning £500 in monthly passive income from it. A second approach would allow me to build up to my target more slowly by putting aside some spare money each week. That would take me longer to hit my £500 monthly target. But it would mean I could start building towards a passive income goal even if I did not have a lump sum of capital in the beginning.

Finding dividend shares to buy

Whatever approach I decided to take, to put my plan into action I would need to start buying dividend shares. The right dividend shares for me would depend on my investment objective and risk tolerance.

Above all, I would focus on quality. So for example, if I found a 5% yielding share but did not think the company’s business could support the dividend in future, I would not buy it. Instead, I would look for companies with sustainable sources of competitive advantage that I felt could lead to ongoing free cash flows. That, after all, is what a company needs to fund dividends.

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