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Although I’ve been investing for 35 years, I remember it was tough to save back in the 1980s. I had precious little money left over for investing, especially at university. Only in the 1990s did I start to invest in earnest, relying on the wisdom of Warren Buffett. Eventually, as my income and portfolio grew, I invested heavily in shares. But what if I started out again from scratch? What if I had only, say, £1,000 to risk today? Initially, I’d play safe by investing in shares in the blue-chip FTSE 100 index. For example, here are two FTSE 100 stocks that I don’t own, but would happily buy now. One share I consider to be almost boring, while the other is much racier and riskier.

1. ‘Boring’ FTSE 100 stock: Lloyds Banking Group

With over 30m customers and 65,000 employees, Lloyds Banking Group (LSE: LLOY) is one of the UK’s largest retail banks. It’s the #1 mortgage lender and a leading provider of credit to British businesses and individuals. Its major brands include Lloyds Bank, Halifax, Bank of Scotland, Birmingham Midshires, Scottish Widows, MBNA, and Black Horse. You’ll find a Lloyds outlet on most British high streets. On Thursday, the Lloyds share price closed at 53.75p, valuing this FTSE 100 firm at £38.2bn.

Why would I invest £500 of my theoretical £1,000 in Lloyds stock today? First, Lloyds is a FTSE 100 heavyweight with an easily understood business model. Second, Lloyds shares have done well over the past year, having recovered strongly from their 52-week low of 33.08p on 1 February 2021. Here’s how this stock has performed over five time periods: One week: +3.5% | One month: +7.7% | Six months: +13.6% | One year: +48.9% | Five years: -18.1%. As you can see, the stock has enjoyed positive momentum in 2021-22, but is down over five years.

Third, this FTSE 100 stock still looks cheap to me, even after recent price rises. Lloyds trades on a modest price-to-earnings ratio of 8.2 and a healthy earnings yield of 12.2%. The cash dividend yield of 2.3% a year is well below the FTSE 100’s 4%, but is rebounding after being cancelled in 2020. To me, these fundamentals look undemanding for a business poised to do well if the UK economy strengthened. But LLOY has been a long-term lemon to hold — and it could crumble again in another Covid-19 crisis.

2. Risky Footsie share: Polymetal International 

If Lloyds is boring, then my second FTSE 100 share is anything but. My risky, racy stock is Polymetal International (LSE: POLY). This is hardly a conventional business. It’s an Anglo-Russian miner of gold and silver, registered in Jersey and with headquarters in Cyprus. Talk about international roots, huh? What attracts me to Polymetal is that its shares have taken a beating recently. Here’s how its shares have performed over five time periods: One week: -3.9% | One month: -18% | Six months: -32.8% | One year: -34.3% | Five years: -6.1%.

After these sustained price falls, this FTSE 100 stock looks too cheap to me today. On Thursday, POLY closed at 1,051.89p, valuing the miner at almost £5bn. Its shares trade on a multiple of just 6.1 times earnings and a bumper earnings yield of 16.4%. The dividend yield of 9.2% a year is one of the fattest in the FTSE 100. However, mining stocks are notoriously volatile. Also, gold and silver prices may decline in 2022, as they did last year. Even so, I still see Polymetal as a buy for me today!

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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Stock markets have been suffering from the winter blues so far this year. In particular, US stocks haven’t experienced a January quite like this one since the financial crisis over a decade ago. It hasn’t been great for FTSE shares either. Some large-cap companies have managed to eke out gains, but the FTSE 250 is down by almost 6% this year as I write.

I’ve found a stock that I think has been oversold. It’s a quality company that I’ve had on my watchlist for a while. Luckily for me, the recent market volatility has made the stock 25% cheaper today. Let’s take a closer look at the investment case.

A quality FTSE company

The company I think has been oversold is Liontrust Asset Management (LSE: LIO), a financial services company offering a range of investment solutions. At the start of the year the shares were £22. But today, the share price has fallen to £16.50. That’s a 25% drop!

Liontrust did release a trading update on 17 January. I don’t think this was the reason for the fall, though. Indeed, the update confirmed that net investor inflows and assets under management and advice (AuMA) all grew. This all looks good to me.

One of the reasons I like the company is the experienced investment management teams it has. This has translated into many strongly performing funds for Liontrust over the years. I think this would be very hard for a competitor to replicate. So to me, it’s a strong competitive advantage and a sign of a quality company.

Liontrust has exceptional growth forecasts too. Earnings per share are expected to rise 42% in the period to 31 March 2022, and by 14% in the following 12 months. The dividend yield is expected to rise from 3.9% to 4.5% over this period as well. That’s an attractive income for my portfolio with earnings per share growing at such a good rate.

What are the risks?

I’m pretty sure I know why Liontrust shares have underperformed this year. It’s related to the AuMA, which forms the basis of the income the company is able to generate. If this falls, then the revenue potential for Liontrust falls with it.

On this point, the poor start to the year for stock markets will likely have reduced AuMA for Liontrust. The recent trading update was only up to 31 December, so there’s a fair chance that AuMA has fallen since due to the volatile stocks markets. Therefore, growth expectations may be cut. This is always a key risk for a business such as Liontrust.

Another risk I should consider is if a key investment manager leaves the company for a competitor. This often results in investors withdrawing their funds from a business, and net outflows increase. The result would be a reduction in AuMA, and therefore lower income potential again.

Why I’m buying

As mentioned, I always look for bargains when stock markets are volatile. I think Liontrust is a good example of this today. The valuation based on a forward price-to-earnings ratio is currently only 13. I think this has more than priced in the recent stock market volatility and risks ahead for this FTSE company. So, I think the stock has been oversold and I’ll be adding the shares to my portfolio.

Dan Appleby 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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Inflation is soaring in the UK. This makes it hugely challenging for share investors like me to make any sort of positive return, let alone a decent one, on my hard-earned cash with dividend stocks.

Consumer price inflation in Britain just hit 30-year peaks of 5.4% and economists are predicting it’ll go higher still.

I’m not in panic mode though. I may have to do more looking around but it’s still possible for me to find great dividend stocks that’ll help me to make a positive return on my money.

Here are three of what I believe to be among the best dividend stocks to buy today. Let me explain why I’d spend £1,000 to add each of them to my shares portfolio.

Admiral Group (5.8% dividend yield)

Consumer spending is under the cosh but there are some things we cannot do without. Motor insurance is one of them. We simply can’t legally get around without it, right? This is why I’m considering buying auto insurance giant Admiral Group right now.

On the flip side, Admiral’s travel division could suffer if Covid-19 rates worsen considerably. This could prompt a return of harsh travel restrictions and a leap in claims. However, I believe the resilience of the insurance firm’s other divisions — including its other home and pet insurance arms and its breakdown cover service — offset this threat and make Admiral a solid dividend stock to buy.

Target Healthcare REIT (5.9% dividend yield)

There’s a lot I like about Target Healthcare REIT today. As a care home operator it operates in the highly-defensive healthcare sector. It can therefore expect rents to continue rolling in even as the British economy struggles. It also ties its tenants down on long leases and its rents are linked to inflation.

Under real estate investment trust (REIT) rules, Target is obliged to pay 90% of annual profits out by way of dividends. This makes many of these sorts of companies some of the best dividend stocks to buy right now. But Target doesn’t come without risk, of course. For example, shareholder returns might suffer if its acquisition-led growth strategy fails to deliver the goods, such as if it fails to land decent acquisition targets.

Legal & General Group (6.6% dividend yield)

Legal & General is another FTSE 100 income share high on my shopping list. This particular company generates huge amounts of cash and this allows it to pay out above-average dividends. As a long-term investor, I think it’s a great dividend stock to buy as the global population rapidly ages. I’m expecting demand for its retirement products and other financial services to rise steadily, helped by the fact Legal & General has one of the most trusted names in the business.

I think the Footsie firm is a fine buy, even though it operates in a massively-competitive industry. Revenues could suffer if it struggles against rivals like Aviva and it may have to spend a fortune to keep up, damaging profits (and, consequently, dividends) in the process.

Royston Wild has no position in any of the shares mentioned. 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.

The Bank of England (BoE) raised interest rates for the second time in as many months yesterday. Policymakers’ decision to lift its benchmark to 0.5% has offered a speckle of hope for savers who’ve suffered poor returns on their cash for years.

As someone who holds a couple of savings accounts, I’m encouraged by today’s news. But I’m not punching the air with glee just yet. I don’t expect today’s decision to be a seismic event in what banks and building societies offer to savers.

Savings rates to remain low?

Today’s rate rise by Threadneedle Street is unlikely to be the last as inflation in the UK rockets. Indeed, the BoE now expects the CPI to move to 7.25% in April, it said on Thursday.

So it’s probable that further interest rate rises will be coming down the pipe. Because of this, savers should probably expect interest rates on their accounts to move higher.

The big question however, is whether the returns on offer from standard savings accounts will improve considerably from current levels. It’s my belief that the answer is no.

BoE governor Andrew Bailey has commented that its benchmark is unlikely to return to pre-Covid levels and that low rates are here to stay. So savings rates are unlikely to improve measurably.

Why I’d rather invest in stocks

This is why I plan to continue buying UK shares with my leftover cash. I’ll continue to hold a certain amount of capital in a savings account. Their low risk means they’re a good place to hold money for a rainy day, or just before making a big purchase.

However, I’ll continue to use stock investing as the primary method of making my money work for me. History shows us that long-term share investors — those who buy to hold stocks for a decade or more — tend to make an average annual return of 8%, although that’s not guaranteed.

Some UK shares I’d buy right now

I believe buying stocks is a particularly good idea in this era of high inflation. Companies whose products have immense pricing power like Diageo and Coca-Cola HBC should remain strong even if inflationary pressures persist, providing me with decent protection.

Precious metals producers like Polymetal International and Fresnillo can also expect the value of the safe-haven assets they produce to rise too. And property stocks like student accommodation provider Unite and warehouse owner Urban Logistics REIT can expect the rents they charge to increase too.

Of course, I have to be careful with how I use my cash to buy shares. Rising costs can hit the profitability of many stocks very hard. But some good research can help me find shares that could thrive — and deliver excellent returns to investors like me — even if inflation remains at elevated levels.

Royston Wild owns Coca-Cola HBC and Diageo. The Motley Fool UK has recommended Coca-Cola HBC, Diageo, and Fresnillo. 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 Lloyds (LSE: LLOY) share price should benefit significantly from rising interest rates. However, it does not look as if the market is factoring this into account when analysing the company and its prospects.

Lloyds share price value 

At the time of writing, the bank is trading at a forward price-to-earnings (P/E) multiple of 6.4. This is based on the lender’s performance for the 2021 financial year. It is projected to earn £5.8bn for this period. 

As the country’s largest mortgage lender, Lloyds has benefited significantly from elevated activity in the housing sector over the past 24 months. Unfortunately, analysts do not expect this growth to last. 

The City has pencilled in a 21% decline in net profit and earnings for 2022 as the housing market cools. I expect this figure to change over the next 12 months.

The economic and interest rate environment is changing all the time, and this is something I have to factor into my calculations. Indeed, over the past 12 months, analysts have revised their earnings projections for the bank in 2022 higher by 25%. 

If this trend continues, I think investor sentiment towards the Lloyds share price could improve significantly. This could drive a substantial re-rating of the stock to a higher earnings multiple as investors reconsider the bank’s outlook. 

That is just what has happened over the past 12 months. The stock has jumped 53% as investors have re-evaluated the company’s prospects and the prospects for the UK economy in general. 

Bumps in the road 

I think it is unrealistic to expect this sort of return over the next year. Further, past performance should never be used to guide future potential.

Still, I expect big things from the company in the year ahead. The combination of higher interest rates and economic growth could provide a dual tailwind for the group. It is also investing heavily in other growth initiatives, such as build-to-rent property, wealth management and credit cards. 

After the disruption of Brexit and then the pandemic, 2022 and 2023 should be the first years in a long time when the bank can really showcase its strengths. 

That said, I think it would be a mistake to say that the group is entirely out of the woods. The UK economic outlook is still unpredictable. The cost of living crisis could have a knock-on effect on economic growth, which will almost certainly impact the bank’s potential. Rising costs could also nibble away at the group’s profit margins and hit its bottom line. 

Moving on 

These are the main challenges the corporation will face over the next 12 months. Still, for the reasons outlined above, I think the Lloyds share price could continue to rally as the lender moves on from the pandemic.

Considering this potential, and the company’s 4.2% dividend yield, I would be happy to buy the stock for my portfolio today as an income and growth investment.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Key points

• I’d target dividend growth to protect my income from inflation
• Build a diversified portfolio to reduce the chance of big losses
• Aim to beat the FTSE 100 dividend yield

As an investor, my main aim is to generate a reliable passive income that keeps pace with inflation. The way I do this is by investing in good quality dividend stocks.

Targeting shares that pay a rising dividend has two big attractions for me. First of all, it gives me an income that I’ll receive without having to do anything. The second attraction is that if I’ve chosen the right shares, I’ll own a stake in growing businesses. Over time, this should mean the value of my shares also rises.

In short, I see dividend shares as a good solution for passive income and long-term capital gains. Of course, dividends are never guaranteed, and future growth is always uncertain. Even companies that have performed well in the past can run into problems.

Some of my biggest investment losses have been from companies that have looked cheap but performed badly. Sometimes these have resulted in painful dividend cuts. This is why I aim to have a diversified portfolio of 20 stocks. That way, problems at one company should only have a limited impact on the value of my whole portfolio.

£100 per month

How much will I need to invest to generate a passive income of £100 per month? That will depend on the dividend yield from my stocks. My experience is that a share’s dividend yield often provides a big clue about how the market thinks the company will perform in the future.

For example, a very high yield is often a sign that the market doesn’t expect the business to deliver much growth. Tobacco giant Imperial Brands currently has a yield of 8%. To generate £100 a month from Imperial stock, I’d need to invest about £15,000.

This stock should provide an attractive initial income, but I don’t expect this business to deliver much growth over the next few years. This could mean the real value of the payout falls over time, if inflation stays high.

On the other hand, a dividend yield that’s too low may rise quickly, but still won’t provide much income. For example, to generate £100 a month from a stock with a 2% yield, such as drinks giant Diageo, I’d have to invest £60,000.

Passive income: aiming to beat the market

My approach is to aim for a forecast dividend yield from my portfolio that’s just above the FTSE 100 average of around 4%. Right now, I’m aiming for an average dividend yield on my stocks of between 4.5% and 5%.

That means I’d need a portfolio of between £24,000 and £27,000 to generate a passive income of £100 a month.

Of course, this income won’t be paid monthly. Most UK companies pay dividends twice a year. Some, like Unilever and Shell, pay quarterly. Over the year, however, the total income I’d receive should be around £1,200 — or £100 a month.

Roland Head owns Imperial Brands and Unilever. The Motley Fool UK has recommended Diageo, Imperial Brands, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Over the past seven decades, Warren Buffett has turned a six-figure sum into a multi-billion pound fortune. This track record makes him one of the best investors of all time. He has used a unique strategy to create wealth since the 1960s, which I plan to follow when looking for cheap UK shares to buy for my portfolio. 

The Warren Buffett strategy

In some ways, the strategy used by the billionaire is relatively simple. He is looking for high-quality companies with strong managers which can grow yearly and produce significant returns for investors.

This strategy is simple to describe, but it is relatively challenging to follow. Some companies might look like they can generate returns for shareholders year after year, but there is no guarantee.

Any number of headwinds could impact a company’s growth potential. Challenges such as rising interest rates, inflationary pressures, and competition are just a few of the risks UK shares face right now.

To help refine his strategy, Buffett only considers adding companies to his portfolio in sectors that he knows and understands well. This is the second part of the strategy that helps distill potential ideas. 

The biggest mistake investors can make is buying something they do not understand. Buffett gets around this issue by only focusing on businesses that he does know well. 

Looking for cheap UK shares 

So there are two parts of Buffett’s strategy I am using to find cheap UK shares. First of all, I will be looking for high-quality companies with growth potential. Secondly, I will only buy businesses in sectors I know and understand well. 

Following this strategy, there are a handful of stocks that I would add to my portfolio right now. 

Two sectors I know well are consumers goods and insurance. In the consumer goods sector, I would buy Britvic and AG Barr for my portfolio. I believe both are well-managed, own portfolios of valuable brands, and have room for growth over the next couple of years (and possibly decades). 

Meanwhile, I am attracted to the insurance giant Admiral and Lloyd’s of London insurer Beazley in the insurance sector. Admiral is one of the country’s largest car insurance providers and is expanding worldwide. Meanwhile, Beazley is using its experience to build a globally diversified insurance group. 

One challenge these companies and the consumer goods stocks outlined above may face going forward is inflationary pressures. These could increase the costs of doing business and impact profit margins.

I believe that by focusing on these companies, I can replicate at least some of Buffett’s success by acquiring cheap UK shares for my portfolio. Over the next couple of decades I think these businesses have the potential to outperform their peers and reward shareholders at the same time. 

Rupert Hargreaves owns Admiral Group. The Motley Fool UK has recommended AG Barr, Admiral Group, and Britvic. 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.