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Over the past couple of decades, a lot of investors have made a lot of money with buy-to-let property. I think the sector does have appeal for some investors, but I would rather follow the advice of Warren Buffett.

Even though he is one of the wealthiest people in the world, Buffett, or the ‘Oracle of Omaha’ as he is often known, does not have extensive property holdings. Unlike other billionaires, the investor tends to avoid real estate, preferring stocks and shares instead.

He is not avoiding real estate because he believes it is a bad investment. He has said that he avoids property because he does not understand the sector. By comparison, Buffett has been buying stocks and shares since he was a teenager. That is around eight decades of experience. 

The Warren Buffett approach 

I am in a similar position as I have never owned buy-to-let property, but I have significant experience as an investor. 

Further, I am aware that rental properties can be difficult to manage. They can also be costly to repair if something goes wrong. Further, in recent years, the government has introduced a series of tax and regulatory changes, increasing costs for landlords. 

These challenges may be straightforward to navigate for investors with a large buy-to-let portfolio. Unfortunately, I do not have the money, time, or experience to build an extensive, diversified portfolio of rental properties. Nevertheless, I do have the time to build a large, diversified portfolio of stocks and shares. 

This is the primary reason why I am following Buffett’s advice and sticking to what I know.

Buy-to-let alternative 

That is not to say I am avoiding the property sector entirely. I do have some exposure to the sector through real estate investment trusts (REITs). One of my most significant holdings is Great Portland Estates, which owns a portfolio of commercial properties in London’s West End. It would be virtually impossible for me to personally build exposure to this market, but I can buy shares in the trust for less than £10. 

By using stocks and shares to invest, I can also spread my risk across different sectors. As well as Great Portland, I also own the insurance group Admiral. This gives me exposure to the insurance sector, and the company also offers an attractive dividend yield of 5%. 

The one drawback of using this Buffett approach rather than acquiring buy-to-let property is the fact I have to trust other managers to look after my money. Investing in a company means that I am investing in the skills of that management team. Not all managers have shareholders’ best interests at heart.

On the other hand, owning and managing my own rental properties means I am looking after my interests. Equity investments are also far more volatile than rental assets.

Despite these drawbacks, I believe that following Buffett’s advice and sticking to what I know is the best way to build wealth in the long term. 

Rupert Hargreaves owns Admiral Group and Great Portland Estates. The Motley Fool UK has recommended Admiral 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.

Key points

• I estimate this founder-led currency specialist stock could double
• Half-year results show a strong return to growth
• High profit margins and good cash generation

Currency specialist Argentex (LSE: AGFX) has fallen out of favour with investors over the last year. However, I can still see a lot to like about this business. For this reason, I’m looking at this penny stock as a possible buy for my Stocks and Shares ISA.

Essentially, Argentex’s business is quite simple. It helps businesses and wealthy individuals handle their foreign exchange requirements. In addition to straight transfers, this includes services such as hedging and other forward deals that provide protection against future exchange rate movements.

This is a sector where the big banks previously dominated. But clients have grown tired of their high fees and slow service. Challenger companies like Argentex are aiming to take market share away from the banks by offering a better, cheaper service.

A contrarian opportunity?

Argentex floated in 2019 and was growing fast until the pandemic struck. But growth stalled during the 2020/21 financial year, with pre-tax profit falling from £10.2m to £7.4m. Some disruption to client activity might seem understandable given the impact of the pandemic, but rival firms such as Alpha FX continued to report rising profits.

The company says that around two-thirds of last year’s profit drop was due to the cost of setting up a new headquarters. Even so, there’s no doubt in my mind that it was a disappointing year. The risk for shareholders is that Argentex won’t be able to regain its previous momentum.

Fortunately, the firm’s most recent results do show an encouraging return to growth. Revenue rose by 33% to £15.7m during the six months to 30 September, while pre-tax profit rose 22% to £3.3m.

If founder and CEO Harry Adams can maintain this rate of growth into 2022, I think Argentex shares could re-rate to a significantly higher valuation. Here’s why.

I reckon this penny stock could double

Argentex and rival Alpha FX are both very profitable, with a return on equity of around 25%. To put this in context, I usually consider anything over 15% to be high.

Argentex shares are currently valued at just 10 times 2022 forecast earnings, whereas Alpha FX is trading on 32 times 2022 forecast earnings. That’s a big difference. To be honest, it seems too big to me, but that’s the way the market rewards (and punishes) growth stocks.

As I mentioned earlier, Argentex’s latest results suggest this business is returning to growth. Broker forecasts believe earnings could rise by 38% during the current financial year, and by 36% the following year. That gives the shares a price/earnings growth (PEG) ratio of just 0.3 — well below the 1 level usually seen as good value.

If Argentex can hit broker forecasts, I think the shares could perform very strongly, re-rating to a higher valuation.

Valuing Argentex at 30 times earnings (like Alpha FX) would see the stock triple from here. That might be a little ambitious, but I can certainly see the potential for this penny stock to double.

For this reason, I’m considering adding a small holding in Argentex to my ISA portfolio.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Alpha FX. 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 think a Stocks and Shares ISA is the ideal vehicle to create a passive income stream for life. These products have two qualities that are ideal for creating wealth. 

For a start, I believe investing in stocks and shares is one of the easiest ways to generate a passive income stream. ISA wrappers allow me to do just that.

They are also tax-efficient. Any income or capital gains earned on investments held inside these wrappers does not attract any additional tax obligations. The only restriction is that the annual limit for these products is £20,000. 

As such, I can earn a tax-free income from equities. This means if I can generate enough income from stocks and shares, I could potentially have a tax-free income stream. 

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Passive income stream 

According to my calculations, a monthly lump sum of just £200 could be enough to generate a passive income stream from my equity portfolio. 

A figure of £200 a month, or £2,400 a year, could generate an annual income of £168 if I can invest this cash in shares yielding 7%. 

The one risk of using this strategy is that dividend income is never guaranteed. Dividend income is paid out of corporate profits. Therefore, if company profits suddenly slump, the payout could be for the chop. This is something I will be factoring in when analysing potential income investments. 

But I am not going to start investing for passive income straight away. I think it would be sensible to try and grow the value of my monthly deposit and switch to income later. 

Indeed, I calculate that if I can achieve an annual return of 10% on my money, I could build a portfolio worth £41,000 after a decade. 

Of course, there is no guarantee that I will earn a 10% per annum return. This is just a ballpark figure. The actual return I will make on my money could vary significantly. It may be a lot more or a lot less than this 10% estimate.

Still, I think this strategy of investing for growth and then switching the income could generate the best returns on my Stocks and Shares ISA investment. 

Stocks and Shares ISA investments

When I have hit a certain level of wealth, I plan to switch from growth investing to income investing. 

I believe this is the best strategy to generate a steady passive income on my money. Some of the best income investments on the market at the moment, which yield around 7%, and I will be happy to add to my portfolio, are Phoenix Group and Direct Line. 

According to my figures, a portfolio of stocks yielding 7% could generate an annual passive income of nearly £3,000 on a lump sum of £41,000. Combined with the tax advantages of a Stocks and Shares ISA, I think this is a desirable potential return. 

Rupert Hargreaves owns Direct Line Insurance. 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.

Even though the Bank of England has started to increase interest rates, the base rate of 0.5% is still far below the inflation rate. Analysts expect inflation to touch nearly 7% this year as the costs of goods and services rise.

bAs such, I have been searching for inflation-busting dividend stocks to add to my portfolio. Here are three income stocks I would buy today, all of which yield between 7% and 9%. 

Leading dividend stocks 

Topping my list with the lowest dividend yield in the pack is the financial services firm Chesnara (LSE: CSN). This company manages books of life and pension policies, a relatively niche and specialist business model. 

The nature of the business means the enterprise has to take a long-term perspective when planning for investments. This approach has benefits and drawbacks.

On the positive side, the company has a relatively high level of confidence in its income projections for the foreseeable future. Cash flows from pension and life policies are somewhat predictable. 

On the other side of the equation, it has to be conservative when managing payouts to investors. The company cannot distribute too much money, or it may breach its regulatory requirements. 

At the time of writing, the stock supports a dividend yield of 7.7%. While the distribution is by no means guaranteed indefinitely, I think it looks desirable in the current interest rate environment. 

Market growth

Over the past couple of years, the wealth of the most affluent section of society has increased significantly. This suggests demand for wealth managers such as M&G (LSE: MNG) could increase as we advance. 

As one of the best-known wealth managers in Europe, the company has a solid competitive advantage. It is also boosting its footprint by acquiring smaller peers and is expanding into different sections of the market. Offering consumers various alternatives to the traditional wealth management service is another growth avenue the group is pursuing. 

One of the main challenges the business will face going forward is competition. It is not the only company in the space. Other wealth managers are also trying to expand their footprint and acquire more customers.

Despite this headwind, I would buy the company with its 8.4% yield for my portfolio of dividend stocks. 

Inflation-busting income

The final company I would buy for my portfolio of dividend stocks is the housebuilder Persimmon (LSE: PSN). 

Shares in this firm currently offer a dividend yield of 9.7%, at the time of writing. The yield has shot up after the government announced it would be seeking to recoup billions from developers to help deal with the cladding crisis. 

The financial fallout from this is possibly the most prominent risk hanging over the stock today.

However, there is also a significant tailwind driving the company forward. That is the structurally undersupplied UK housing market.

It seems likely that demand will continue to outpace supply in the housing market for the next three to five years, at least, suggesting Persimmon should be able to continue to find buyers for its new properties for the foreseeable future. 

With this tailwind, I think its dividend is here to stay. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Chesnara. 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 hunting for the best growth stocks to buy as 2022 gets up and running. Here are two top UK shares on my shopping list today.

Grabbing a slice of something nice

Consumer spending is coming under pressure, but I think Domino’s Pizza Group (LSE: DOM) could be poised to thrive. It might even benefit if people switch down from going on more expensive nights out to staying indoors and ordering takeout.

I’d buy Domino’s because the UK online food delivery is tipped for strong and sustained growth. And this particular operator has the brand power to make the most of this opportunity. Researchers at Statista think the British takeaway delivery market will be worth £12.6bn by 2024. That compares with the £10.5bn it was valued at last year.

Domino’s Pizza has a long record of unbroken annual earnings growth behind it. And City analysts expect the company to keep this going with bottom-line rises of 2% and 4% respectively. Sure, these numbers aren’t exactly spectacular. But in uncertain times like these I think a reliable growth generator like this UK share could be worth its weight in gold.

I am going to keep in mind that a shortage of drivers at Domino’s has been affecting its ability to meet orders and to push up costs. This is a problem that could take a big bite out of profits going forwards. It’s interesting to see that the company’s US cousin is offering customers a $3 incentive to pick up their pizzas instead of opting for home delivery!

One of the best counter-cyclical stocks to buy?

Unfortunately the cost of living and operating a business in Britain is rocketing. It’s a scenario that threatens to send the number of corporate insolvencies through the roof. So I expect demand for financial services business Begbies Traynor Group (LSE: BEG) to remain strong.

The Federation of Small Businesses (or FSB) commented last month that “thousands of small businesses are on a knife-edge” following a tough Christmas period. It looks like things could continue to get worse before they get better, too, as energy prices increase and interest rates rise. As the FSB notes, Bank of England action this week “will heap pressure on many indebted businesses”.

This is particularly concerning as corporate insolvency rates are already ballooning. Government data shows that there were 1,486 such insolvencies in December, up 20% year-on-year and 33% higher from levels recorded in December 2019.

It’s no surprise that City analysts think Begbies Traynor — which provides insolvency services and other support to distressed firms — will remain busy. They’re expecting earnings to rise 28% and 10% in the financial years to April 2022 and 2023 respectively. Stronger-than-expected economic improvement could hit these profit forecasts and dent my returns as a potential investor. 

I think it’s a great stock to buy for my portfolio, but not just for the near term. Its acquisitions have delivered strong profits growth for the past half a decade, and the company remains committed to expansion through M&A activity. 

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Dominos Pizza. 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 5G revolution promises internet capacity at 100 times greater than before. This means new possibilities for businesses, lower lag times for gamers, and faster download times for the rest of us. The 5G stock that I’m buying to participate in this transition is Verizon (NYSE: VZ).

1. Verizon and 5G

There are immediately two concerns with Verizon as a 5G stock. First, Verizon is unlikely to be the biggest winner in the 5G revolution. Second, the company has had to make huge capital investments in order to build out the infrastructure for the 5G network. I think that each of these concerns can be met, though.

Overall, I think that Verizon’s limited upside is offset by a degree of predictability. My general view is that Verizon is easy to identify as a part of the infrastructure supporting 5G internet. By contrast, I find it hard to tell which company will provide the chips for smart devices or win the battle for gaming supremacy. So while Verizon is unlikely to see the biggest jump in earnings from the introduction of 5G, I think it comes with a predictability that I find attractive.

Verizon has taken on substantial debt to build out its 5G infrastructure, but I think that this is currently priced into the stock. Verizon stock currently has a market cap of $223bn. The company has around $10bn in cash, around $178bn in total debt, and produced just over $20bn in free cash in 2020. This gives a business return of just under 6%. As the debt decreases and the free cash flow increases, I expect this to grow over time, making this a good 5G stock for me to invest in. 

2. Market-beating returns

An investment in Verizon stock at the end of 2011 would have returned an average of 6.6% annually, including dividends. An investment into an S&P 500 index fund at the same time would have returned an average of 14.4% per year on the same basis. At the stock level, Verizon has clearly underperformed the broader index over the last decade or so. 

In order to evaluate an investment, however, Warren Buffett says that we should look to what the business itself produces. When we do this, I think that things look different in comparing Verizon to the S&P 500. Since the end of 2011, Verizon has grown its operating earnings by just under 150%. Operating earnings for the S&P 500, however, have only increased by around 66%.

The difference between the stock returns and the business returns is the result of a change in the multiple that investors are willing to pay to own each security. Unlike Verizon, the S&P 500 now trades at a significantly higher price-to-earnings (P/E) multiple to its 2011 levels. The S&P 500 traded at a P/E multiple of 12.5 in 2011 and trades at a P/E multiple of around 23 today. Verizon, on the other hand, used to trade at a P/E multiple of 18 and now trades at a multiple of just under 11. 

I think this means that, when we follow Buffett’s advice and look at what the underlying asset has produced over the last decade, we can see that Verizon has clearly outperformed the S&P 500. As a result, I think that Verizon’s lagging stock price presents an attractive investment opportunity to add a 5G stock to my portfolio.

Stephen Wright owns shares of Verizon. 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.

In August 2020, Warren Buffett revealed that Berkshire Hathaway had invested around $6bn into five Japanese firms. Some analysts believe that this has netted a $2bn profit so far. In light of this, I’m looking at the Japanese stock market and how I might invest.

Why Japan?

Japan is home to the third-largest stock exchange in the world, the Tokyo Stock Exchange, and some of the world’s most famous companies such as Sony and Toyota.

The most well-known Japanese stock market index is the Nikkei 225. This index tracks the largest and most liquid 225 publicly listed companies in Japan. It’s also used as a general measure of Japan’s economy and it’s stock market’s performance.

There are a few reasons to think that the Sage of Omaha sees opportunities in the Land of the Rising Sun. First, at the time of writing, the index is at just under 27,500. This is still well below the 38,915 level it reached in December 1989. Second, though the long-term average P/E ratio of the S&P 500 index in Warren Buffett’s domestic US market is around 15, it currently sits a lot higher at around 25. At the end of 2021, the flagship Japanese index was around 17. Perhaps he sees better value in Japan.

An ETF to consider?

An ETF (exchange-traded fund) is a low-cost fund that tracks an index or sector and can be bought and sold like a share through most online brokers. Such an approach allows me to invest in the Nikkei 225 by just buying shares listed on the London Stock Exchange. For my portfolio, this seems to be the simplest way of investing in Japanese shares.

The one I’m looking at is Xtrackers Nikkei 225 UCITS ETF (LSE:XDJP), which has been trading since 2013 and has a very reasonable management charge of 0.09%. The three largest holdings at the moment are Fast Retailing, which owns the global Uniqlo brand, Tokyo Electron, which produces semiconductors, and Softbank, the investment management juggernaut.

Perhaps the biggest drawback of investing in Japanese stocks is that it is completely new for me. This is a market I do not have a lot of knowledge about and that could be very risky.

Also, the performance of this ETF has been poor. Over 12 months this fund is down around 12% and year-to-date has fallen around 7%.

Reasons for optimism

However, despite these negatives, I feel there are reasons to be optimistic going forward.

First, the relatively new Prime Minister, Fumio Kishida, is enacting policies that could be positive for the Nikkei over the next few years. For example, Japan’s Digital Agency was launched in 2021. Investors expect this to drive digital transformation across both public departments and the private sectors. Second, ambitious targets have been set to reduce emissions. This could see a lot of money flowing into energy companies or firms involved in clean power technology.

Investing in a different market can be unnerving and risky. However, it also provides opportunities to learn. For my own holdings, I’m seriously considering following Warren Buffett’s lead and investing in Japanese stocks as part of a balanced portfolio.

Niki Jerath does not own 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.

Key points

• High oil and gas prices mean Shell generated $40bn of spare cash last year
• Buffett is known for liking business that’s generate plenty of cash

Shell (LSE: SHEL) shares are trading at the highest level seen since the start of the pandemic. Soaring oil and gas prices mean the company is currently producing huge amounts of surplus cash, even though investment in low-carbon energy is increasing.

Is Shell the kind of cash-generative, mature business Warren Buffett might buy? I’ve been taking a look.

Bumper profits

Shell’s 2021 results were expected to be good, but they turned out to be better than forecast. The FTSE 100 group generated adjusted earnings of $19.3bn last year, up from just $4.9bn in 2020. 

Oil companies’ profits can be hard to understand, due to some complex accounting. I prefer to focus on a much simpler metric — free cash flow. This represents the surplus cash generated by a business each year. This money can be used for dividends, for example.

Shell generated free cash flow of $40.3bn in 2021, more than double the $20.8bn it reported in 2020. This tidal wave of cash helped to support a $23bn reduction in net debt. Some of this cash will also be used to fund $8.5bn of share buybacks and Shell’s quarterly dividend, which will rise by 4% this quarter.

I can see lots of elements that Buffett might like here, but is Shell really his kind of stock?

Would Buffett buy Shell shares?

Buffett once said that “our acquisition preferences run toward businesses that generate cash, not those that consume it”. Shell certainly ticks that box at the moment.

And although he is known to have a liking for defensive businesses like Coca-Cola, he’s not shy about owning energy stocks. Buffett’s firm Berkshire Hathaway reported a $3.9bn holding in US oil giant Chevron at the end of September.

So would he buy Shell? Ultimately, I don’t think so. But I suspect the main reason for this might be that it’s a European business.

Buffett believes strongly in the importance of staying within his circle of competence when he invests. For him, one element of this is his deep knowledge of the US market and American business. As a result, he rarely invests outside the US. Given that there are suitable alternatives to Shell on the US market — such as Chevron — I think he’s unlikely to buy Shell shares.

Here’s what I’d do

My experience suggests that the best time to buy commodity stocks is when prices are down. That’s not true at the moment. Oil and gas are both trading at levels which haven’t been seen since 2014.

The problem with this is that history suggests prices won’t stay high forever. When they fall, Shell’s profits are likely to drop, and investor sentiment will weaken.

Admittedly, Shell shares look quite cheap at the moment, on around eight times 2022 forecast earnings. However, these could be peak earnings.

I think the dividend yield is a better measure of valuation. Shell’s share price surge has pushed the stock’s yield down to around 3.4%. I’d want a yield of 4-5% to invest in this mature — and possibly declining — business. That means a share price of around 1,600p.

I might buy Shell shares, but not at the current price.

Roland Head 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.

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