Key points

• The milder Omicron variant should mean greater possibility of foreign travel
• The nuclear segment is forward-looking and will be integral to decarbonisation
• Defence contracts have supported the Rolls-Royce share price through the pandemic 

The Rolls-Royce (LSE: RR) share price has been volatile throughout the entire pandemic era. The company, known primarily for manufacturing engines for aircraft, has been forced to make sizeable cutbacks to its workforce. Going forward, however, I think this stock could be an excellent investment. I outline three reasons why I think the Rolls-Royce share price will soar – let’s take a closer look.

Milder Omicron will bolster the Rolls-Royce share price

Part of the reason Rolls-Royce was hit so hard during Covid-19 is because it is paid per flying hour by airlines using its engines. As most planes were grounded during this time, cash flow was almost non-existent.

With Omicron, we finally have some brighter news. This variant is notably milder than Delta and this has led many countries around the world to open their borders again. More open borders mean more aircraft in the sky. In turn, this increases the number of Rolls-Royce engines in action and that finally translates into consistent revenue for the company.

This is reflected in a trading update from December 2021, when free cash flow (FCF) guidance was upgraded to exceed £2bn. Understandably, the new sale of civil engines was still low, with airlines still recovering from the pandemic. There is, of course, the risk of further variants arising. This would impact any recovery. In general, though, I think things are going in the right direction.

Going nuclear

I also suspect the Rolls-Royce share price will benefit from the company’s move into nuclear energy. It has detailed plans to build a number of small modular reactors (SMRs) throughout the UK.

This project has already secured £85m from the Qatar Sovereign Wealth Fund, in exchange for 10% of the venture. The UK government will also match any investment up to a limit of £210m. This suggests that countries are now viewing nuclear power as a means to decarbonise.

Rolls-Royce plans to have these SMRs on the grid by the 2030s, providing a clean energy solution far into the future. Each SMR will occupy just 10% of the space of a traditional nuclear reactor. It will also produce the energy equivalent to that derived from 150 wind turbines.

Defence – the heart of the Rolls-Royce share price

The defence segment has buffeted the company throughout the pandemic, because it involves long-term government contracts. Indeed, a December 2021 trading update stated that defence trading was broadly in line with expectations.   

In September 2021, Rolls-Royce secured a £1.9bn contract with the US Air Force. This involves servicing B-52 engines, of which there are 650. In line with the stock’s long-term plans, this contract will last for the next 30 years.

These three factors strongly imply that Rolls-Royce operates shrewdly and possesses long-term planning skills. I am preparing for an imminent uptick in the Rolls-Royce share price as more people travel throughout spring and summer 2022. There is always the risk of further variants, however, denting this progress. The nuclear and defence segments show that the leadership is preparing for many years into the future. I will now be adding to my Rolls-Royce shares without delay.

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.

Warren Buffett is perhaps the world’s most successful general investor. And his compounded gain between 1964 and 2020 works out at 20% a year. He achieved that via his conglomerate of businesses and stocks, the US company Berkshire Hathaway.

At first glance, that figure might seem unimpressive. But it means the total gain over the period was about 2,810,526%. And if I’d invested £1,000 in Berkshire Hathaway in 1964, I’d now be sitting on a shareholding worth about £28m — and that is impressive!

But how did he do it? His business partner, Charlie Munger, distilled the essentials of their investment strategy into four easy rules.

Rule 1. Understand the business

Whether buying complete companies to bolt on to Berkshire Hathaway or stocks for the company to own, Buffett never strays beyond his “circle of competence”.

In other words, if he doesn’t fully understand how a business makes its money he avoids it and its shares. And he felt that way for a long time about technology businesses, for example. It’s only in recent years that he’s ventured into shares of Apple.

But by the time Buffett bought Apple stock, the business model had strong consumer-driven credentials and a rock-solid competitive advantage in its markets.

Rule 2. Durable competitive advantage

And Apple is a great example of a company with a strong brand followed by legions of loyal customers. Many Apple customers come back repeatedly for more of the firm’s products.

Such businesses are desirable because their pricing power helps them to preserve margins in the face of rising costs, such as when inflation bites. Indeed, Apple puts its selling prices up and nobody seems to care, they just keep on buying the products.

Most of Berkshire Hathaway’s businesses and stocks have similar advantages. Buffett describes such companies as having economic moats that are hard for competitors to cross.

Examples he’s holding include American Express and Coca-Cola. But in the UK stock market, I’d look at companies such as Diageo, Unilever, and National Grid among others.

Rule 3. Management integrity and talent

This one’s harder to pin down. But I’d monitor the news flowing from a company while it’s on my watch list to gain insight.

On top of that, well known UK investor John Lee (Lord Lee of Trafford) recommended, in his book, ensuring the directors have meaningful shareholdings in the company themselves. And also that they have clean reputations. He also advises that we look for a history of a stable board of directors with infrequent changes.

Rule 4. Ensure a margin of safety

Buffett’s use of a margin of safety is something he learnt from his early mentor Benjamin Graham — the father of value investing. It means aiming to buy stocks when they price a business below what we think it’s actually worth.

And that’s why Buffett often looks for stocks and businesses when others are selling because they are worried about something. So bear markets, setbacks, and corrections can produce rich pickings for investors following Buffett’s four golden rules.

Positive outcomes are never guaranteed even if I use Buffett’s and Munger’s four rules to pick stocks. But I think they are golden nuggets of wisdom. And I’m using them to pick UK stocks right now.

American Express is an advertising partner of The Ascent, a Motley Fool company. Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple, Diageo, 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.

Every few years, a hot new technology comes along that excites investors. Thinking that it could benefit from booming demand in years to come, they smell the prospect of profits. Over the past couple of years, alternative energy forms have been such an area. That helps explain why lithium shares have attracted growing amounts of attention. Lithium is used in batteries that power electric vehicles, for example.

So, if I want to focus on growth potential in my portfolio, ought I to buy some lithium shares for it now?

Pros and cons of early stage investment

First, I think it is worth considering whether a potentially promising technology makes for a profitable industry in future – and what that can mean for shares of early players.

If lithium does indeed turn out to be an important part of the alternative energy sector, then there is clearly potential for the industry to grow substantially. Already, lithium is a key component for many alternative energy applications, such as batteries for electric vehicles. Indeed, electric vehicle maker Tesla is so keen to secure new sources of lithium that in 2020 it expressed interest in mining the metal itself.

However, not all early stage technologies end up developing into large markets. Sometimes, anticipated demand can lead to a gold rush that makes the market unprofitable for everyone. That can damage enthusiasm even for a promising technology, hurting demand.

Another common challenge is alternative solutions emerging in response to a need. This could happen with lithium. As companies see how demand for lithium threatens to drive up prices, they may get more experimental in exploring possible alternatives. If any of them works and is cheaper, that could permanently threaten the appeal of lithium.

Both the potential rewards and risks can be reflected in the share prices of companies focussed on early stage technologies. The dotcom boom is a good example of this. Some shares that soared, such as Amazon, later went on to exploit the new business area successfully. Their shares ended up increasing in value even more despite their already high prices. But many other companies burned through their resources and went bankrupt, like Boo.com. Others, even with solid businesses, took years to see their share prices recover to the highs of the dotcom era. For example, UK IT services group Computacenter peaked in February 2000. It only reached the same highs again two decades later, in February 2020!

So, while investing in a technology in its early phases can be rewarding, it can also be very risky.

Lithium shares as a way for me to get exposure

There are different ways I could seek to get exposure to the long-term potential of lithium. For example, I could buy shares in a company that has plans to mine lithium, such as Zinnwald Lithium. I could invest in existing lithium miners, such as Tianqi Lithium. I could buy shares in diversified miners whose large portfolios include some lithium projects, such as Rio Tinto. Or I could invest in companies in a different part of the lithium supply chain, such as battery maker Contemporary Amperex Technology.

Immediately when considering these options, I already have some concerns about what they might mean for risk management in my portfolio. Some are listed on stock markets with very different standards of corporate governance to the UK. That could expose me to risks I am not used to when investing in UK shares, such as a different treatment of minority shareholders.

Another observation is that some lithium companies lack diversification. They may not have large or any interests outside lithium. Even within lithium, some of them are concentrated on just a single project. That could be good for me if the company does well. For example, if Zinnwald’s project turns out to be highly productive and lithium prices remain high, the return for its shareholders could be very big. But such a lack of diversification exposes me to more risk as an investor than I can accept. I prefer investing in companies that have some degree of diversification. Disappointments in mining projects are common, after all. Plots can contain less metal than hoped, extraction costs can be higher than expected, and successful projects sometimes find their profits hurt by new windfall taxes.

Lithium share valuation

On top of that, I have some concerns about valuation. Even a great company does not necessarily make for a good investment, depending upon the price I pay for it.

Given the excitement in recent years, many lithium shares have already seen their prices soar. Ganfeng Lithium, for example, may have lost 5% in the past year but it is still up 846% over the past five years. Tianqi Lithium is up 57% over the past 12 months and 246% over five years. Contemporary Amperex is up 55% in a year – and 1,018% in five years.   

Does this mean that future prospects are already factored into the share prices of many lithium companies? Not necessarily. After all, it is still unclear what future demand and supply will be for lithium. That also means that future prices are hard to know, which will have a big impact on long-term profitability. If lithium remains in high demand, leading companies may increase their profits in years to come. That could drive their share prices up further.

Too much success, though, can also hurt the economics of a developing industry. It often leads to more competition, higher costs to secure exclusive rights, and possible downward pricing pressure. I think all of those risks could hurt lithium profitability in future.

So although I do think some lithium shares could help add growth to my portfolio, I will not be adding any at the moment. The risks are high and I am concerned about lack of diversification. I expect many lithium companies to end in failure. I would rather invest in shares where I can see that I have a strong chance of a good return than ones where I think I have a weak chance of a spectacular one.

Christopher Ruane has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon and Tesla. 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 the middle of what many consider to be a stock market correction, we have a great opportunity to invest some money. With shares trading cheap relative to only a few weeks ago, now is a great time for me to get in and invest in some high-quality FTSE stocks.

I will look at the investment case for two great companies that I am considering: Anglo American (LSE: AAL) and International Consolidated Airlines Group (LSE: IAG).

Anglo American

Anglo American is a global mining company, being the world’s largest producer of platinum as well as a major producer of copper, nickel, iron ore, and diamonds.

When it comes to the economic fundamentals of a mining company, fixed costs are high as a proportion of total costs. As a result, with any increase in addition revenue comes a significant increase to profits. This results in a business model in which changes in demand from consumers has a large proportionate impact on performance.

Tailwinds

While mining companies have fairly predictable economic fundamentals, they are also highly cyclical. This means that they typically correlate with the business cycle.

Therefore, in a year where the economy is still fighting back to recover from the pandemic, we should see growth in demand for goods that rely on the materials Anglo American produces. If I believe this to be the case in 2022, then I expect high profits and associated share price growth.

Headwinds

In attempts to control and suppress inflation, it is safe to assume that hawkish policy making is on its way. With rate rises comes a slowing of short-term economic growth. Therefore, as mining companies are cyclical businesses, if I believe the cooling effects from tightening monetary policy will have a substantial impact on the economy, then I will steer clear.

International Consolidated Airlines Group

IAG has had a terrible time over the last few years. Being hit extremely hard by the pandemic due to the reduction in consumer air travel, the share price has fallen from 420p (pre-pandemic) to around 160p today. However, this potentially presents a huge opportunity for share price gains.

Tailwinds

With societies across the world opening up and attitudes towards being comfortable with travel reverting back to the norm, one would assume the demand for air travel will recover in due course.

This could be the year we see that return. The business fundamentals of International Consolidated Airlines Group are sound, and as a result recovery from the pandemic is the driving force for my optimism.

Headwinds

The main cause for concern with International Consolidated Airlines Group is vulnerability to shocks stemming from new variants or regulation, as seen with the discovery of Omicron, where the share price fell 17% in the final five days of November.

Conclusion

For me, both Anglo American and International Consolidated Airlines Group are great opportunities. With the economic recovery I expect this year, I think Anglo American will perform well. When it comes to IAG, if I can look past short-term volatility with a long-term view, it should definitely be in my portfolio.

Tommy Williams 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 soaring at the moment, the value of my cash in the bank is dwindling. With this in mind, I am on the lookout for the best dividend stocks to make me a passive income. One stock I’d look to add to my holdings to beat inflation is Rio Tinto (LSE:RIO).

As a quick reminder, a dividend is the distribution of some of a business’s earnings to its shareholders as a reward for investing their capital. This capital may have helped fund growth and performance. The way to determine a firm’s dividend yield is to look at the latest dividend payment and the current share price. If a firm pays a dividend of 10p per share, and the share price is 100p per share, the yield equates to 10%.

Mining giant

Rio Tinto is one of the world’s largest mining firms with over 60 mining operations spanning 35 countries. It is supported by close to 50,000 employees. It mines and sells a range of minerals such aluminium, copper, iron ore, lithium, and diamonds to over 2,000 firms throughout the world.

As I write, Rio shares are trading for 5,372p. At this time last year, the shares were trading 4% higher, at 5,637p.

Risks involved

One of the biggest risks of investing in commodities firms like Rio Tinto is the volatility that comes with it. Commodities prices and demand is closely linked to the economy and geopolitical issues. When there is economic uncertainty, like there is currently, prices can jump up and down. A lower price is usually bad news for firms like Rio as it could squeeze margins and performance, in turn affecting any dividend and passive income I hope to make as an investor. Rio has cut dividends in the past too.

Finally, when investing in dividend stocks, inflation is still a threat. If the dividend is cancelled or drops below inflation, then I may not see a return on my investment.

Passive income champion

I believe Rio Tinto is one of the best dividend stocks I could buy to beat inflation. Firstly, it sports a very attractive dividend yield of 9%! It is worth noting that the FTSE 100 average is 3%. Furthermore, at current levels, the shares look cheap with a price-to-earnings ratio of just six.

In order for any passive income to continue, performance has to be consistent. Rio has a good track record of performance. I do understand that past performance is not a guarantee of the future, but I use it as a guide when assessing investment viability. Looking back, I can see revenue and gross profit has grown year on year for the past four years.

Finally, Rio has a cash rich balance with no debt on the books. I am buoyed by this as it means more money from performance in the future could be paid as dividends, rather than paying down debt. This is one of the key fundamentals I look at when looking at income investments for my holdings.

Overall, Rio’s juicy dividend yield, powerhouse position in its respective market as well as performance record and lack of debt, fill me with confidence I can make a passive income from Rio shares. I would add the shares to my holdings at current levels.

Jabran Khan 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.

Over the last 10 years, the Scottish Mortgage Investment Trust (LSE: SMT) has been the undoubted star of the FTSE 100. In that time period, the share price has risen over 700%. However, those heady days of growth now seem like a distant memory with the share price down 33% in just over two months. But are the shares a value trap or a bargain?

Growth vs. value stocks

The fall in Scottish Mortgage share price recently can be put down to one single factor – investor fear of rising interest rates.

When the pandemic struck, central banks slashed interest rates to 0% and pumped colossal sums of money into the economy. With such favourable conditions, a whole raft of tech-related stocks surged in price. This included many of the stocks that Scottish Mortgage invests in.

However, Scottish Mortgage not only invests in well-known names like Tesla and Nvidia. Of its portfolio, 20% is in unlisted companies. Such companies are highly speculative bets in nascent industries. In other words, they don’t make a profit.

As inflation soars and rising interest rates loom, two problems have emerged with growth stocks:

1. Increasing cost of capital eats into the returns of companies that are highly indebted to fuel their growth ambitions
2. The future cash flows of tech-related businesses have to be discounted back to the present day by a larger amount to offset the effect of rising inflation

In such an environment, investors are rotating out of growth and into value stocks. These stocks are historically undervalued and offer near-term growth potential. For example, look at Shell and BP. With rising oil and gas prices, they are a much safer bet for investors at the moment than speculative plays.

Is Scottish Mortgage a falling knife?

So, is the Scottish Mortgage share price an opportunity to get a great investment at a lower price, or a danger to be avoided – the proverbial falling knife? This question is best answered by considering an investor’s time frame. If I intend holding the stock for less than five years, then the downside risk outweighs any potential short-term share price bounce. I have for some time argued that the US stock market is in a bubble with many stocks reaching valuations that are completely detached from their underlying fundamentals.

I draw parallels between the unlisted companies in Scottish Mortgage with Cathy Wood’s Ark Innovation ETF. This fund, the undisputed No.1 of 2020, has completely imploded over the last year. Indeed, the highly speculative nature of this ETF reminds me of Neil Woodford’s foray into such investments. We all know how that one ended.

Of course, Scottish Mortgage does invest in high-quality businesses too. Most of these have delivered astonishing growth over the last few years. But the simple reality, is that the higher the stock price goes the lower the expected future returns become; and an ever diminishing one at that, once you factor in runaway inflation.

To my mind, the only way to make money by investing in Scottish Mortgage is holding for the long term (10+ years). That gives the investment trust time for its investment thesis to play out. One only has to look at Amazon and Tesla for evidence of that. Therefore, until the bubble deflates in US equities, I will not be investing. The risks are too great for me.

Andrew Mackie has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon and Tesla. 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:

• Ocado shares jump 7% today based on a new report from Credit Suisse
• The bank is forecasting shares to rise to 1,750p in part due to unveiling new grocery-picking robots
• I think that a small allocation to the shares is a good move, but risks do remain

——————————————————————————————————————————————————————————–

The Ocado (LSE:OCDO) share price is up 7% today, making it the best performer in the FTSE 100 index. It’s also a welcome jump higher for existing shareholders. This is given the fact that Ocado shares are down almost 50% over the past year. With a clear driver for this move today, I need to decide if this is a flash in the pan or if this represents the start of a turnaround.

Credit Suisse upgrades rating

The main reason for the jump today came after the investment bank Credit Suisse decided to upgrade its forecast for Ocado shares. Analysts within the bank changed their prediction for the share to ‘outperform’, with a new share price target of 1,750p. Currently, the share price trades at 1,534p, so there’s another 14% upside.

Some might find it surprising that one new statement from a research team in a bank can cause the share price to move so much. Yet Credit Suisse is one of the leading investment banks, with a very well respected research arm. Further, it’s important to note who reads these reports. Before it reaches the public eye, it’s sent around to key clients, including pension funds, hedge funds, and other big players.

Therefore, if Credit Suisse say a stock could do well, there’s a high chance that their clients will buy the shares. So really, the move in Ocado shares today is a ripple effect of the report as it got published and read.

Finding value in Ocado shares

The analysts raised a few points for the change in sentiment. Firstly, the team think that the 50% correction over the past year now accurately prices the risks of the business. This echoes my view that I made a long time ago that the stock was overvalued. The halving of the share price does make it a more appealing (fairly valued) stock for me to consider buying.

Secondly, the team pointed to grocery-picking robots that are going to be introduced later this year in the warehouses. Such robots will provide greater efficiency, providing faster delivery times with less errors.

CEO Tim Steiner said that the robots were “transformational in the market and really drive our innovation forward”. I do think that the robots will help Ocado compete better in the market. One of the reasons why the company has struggled recently is due to new competitors such as Getir and GoPuff being able to deliver quicker. With robots, Ocado should be able to undercut the competition here and take back market share.

On the basis of the above, I am considering buying a small amount of Ocado shares. I would want to leave some money spare to invest more if the share price continues to fall. The risks around tough competition does still mean that this rally might be short-lived, which is why I want to stay nimble.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Ocado 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

• A Covid recovery is evident in the travel industry
• easyJet is bouncing back quicker than some competitors
• The share price is undervalued compared to the aviation sector

No airline has escaped the battering of the Covid-19 pandemic. From March 2020, passenger numbers metaphorically fell of a cliff. The easyJet (LSE: EZJ) share price fell two-thirds on the outbreak. Nearly two years on, has anything really changed? Is a recovery now really on the cards? Here’s why I think easyJet shares are cheap and why I’ll be snapping them up without delay. Let’s take a closer look.

The easyJet share price and the Covid recovery

Only this month, a number of countries including Denmark and Norway opened their borders again. By these rules, fully vaccinated travellers will be able to travel smoothly from the UK and back. These Scandinavian countries joined many others in continental Europe that had already opened up.

We can observe this recovery effect in easyJet’s recent trading update from December 2021. It shows that company losses halved for the three months up to 31 December 2021 compared to the same period in 2020. This trend implies that company fundamentals are travelling in the right direction. With this in mind, I think the future uptake in international travel suggests the current easyJet share price is a bargain at just half of its pre-pandemic levels.

What’s more, revenue also increased during those three months. In the report, revenue grew to £805m. This marked a nearly 500% rise compared with the same period in 2020. This tells me that passengers are beginning to travel on aircraft again. This increased travel stems from more open borders and better passenger confidence in pandemic flying.

The real benchmark of recovery in the easyJet share price, however, is passenger capacity levels. These are also up as per the December update. During this time, capacity was 11.9m compared with the 2020 rate of 2.9m. While competitors, like Wizz Air, also reported a 243.4% increase in passenger numbers for the final three months of 2021, easyJet still outperformed. Its passenger growth stands at around 410%.

So, is it really dirt cheap?

A good marker for gauging the cheapness of a particular stock is the price-to-earnings (P/E) ratio. At the current time easyJet has a forward P/E ratio, based on forecast earnings, of around 13. Within the aviation sector, however, the average P/E ratio is 20. For me, this indicates that the easyJet share price is a bargain at current levels.

Investment banking firm Stifel agrees. Just last week, it upgraded easyJet to ‘buy’ and hiked its target price to 750p from 600p. Part of its justification was the expansion and success of easyJet holidays, and “positive momentum into the summer”. It is worth noting that the unpredictable nature of Covid-19 could disrupt this recovery in 2022 and set back some of the progress that has been made. As long as no other serious Covid variants emerge, however, I do think the easyJet share price is dirt cheap.

All of the figures, from revenue to passenger numbers, are heading in the right direction. A recovery is truly on the cards. What’s more, the shares are cheap. I will be buying easyJet stock now.        

Andrew Woods 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.

What would I buy if starting out afresh in investing? With an initial £5,000, I think the following could be among the best shares for me to buy.

A growth stock

My first pick is FTSE 250 growth stock Oxford Biomedica. The company specialises in gene-based medicine. And, I think it offers safety when compared to companies at the leading edge of drug development. That’s because Oxford Biomedica’s big product is its drug delivery platform, LentiVector. Other companies pay to use it, and Oxford Biomedica gets drug royalties on top.

There’s risk that the technology will be overtaken. And highly valued tech stocks can be volatile too. But the share price has fallen since October, and I smell a buying opportunity.

A dividend stock

When I think dividends, I think FTSE 100. And right now, I like the look of Taylor Wimpey. Housebuilders can be cyclical, and the Taylor Wimpey share price has had a volatile year. The shares had a poor start to 2022, on top of a mere 1.5% gain over the past 12 months. But that helps push the dividend yield up.

Analysts are forecasting a yield of 7.5% in 2022. Now, the risk is that dividends will fall in the future, and I fully expect them to be up and down. But the UK’s chronic housing shortage convinces me this is among the best shares to buy for long-term income.

A penny share

I see plenty of bargains around priced at under £1. And I’m in the FTSE 250 again, with Mitie Group. At 62p as I write, Mitie shares are down 40% over five years. And the company has suffered several years of falling earnings.

Mitie provides building maintenance, management, and improvement services. And that sector has been hit by the Covid-19 pandemic. But it’s getting better. My Motley Fool colleague Manika Premsingh has examined the firm’s latest trading update, which looks positive. I see a risk that the firm’s expectations are already factored into the share price. But I like Mitie as a long-term prospect.

A US stock

I’ve always considered financial services among the best shares. And right now, Western Union looks good value. As the developed world moves even further towards online money transfer services, Western Union will face risks. But a large part of the developing world still relies on remittances sent via the global network of WU agents. And I really do see that continuing.

The WU share price has dipped 15% in the past 12 months. But that drops its trailing price-to-earnings down below 10. Despite the growing competition from higher-tech alternatives, I see it as good value even with the risks.

Best share for diversification?

My final pick is one I already own, City of London Investment Trust. Starting any new portfolio, I’d include a diversified UK-focused investment trust. With just five slots in a £5,000 portfolio, it’s hard to get any meaningful diversification any other way.

Additionally, City of London has been paying dividends of 4%-5%. And it has raised its dividend every year for 55 years in a row. There’s a danger the share price could tank should that run come to an end. But I do think it’s one of the best shares I could buy if starting out.

Alan Oscroft owns City of London Inv Trust. 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.

Passive income is a regular income stream that requires very little effort, and it’s something I’m passionate about searching for. The idea of investments that can earn me hands-off returns while I’m working or sleeping is a tantalising proposition. For my own portfolio, I think that a high dividend-paying FTSE 350 ETF might be the best fit.

A FTSE 350 ETF

I’m looking at iShares FTSE UK Dividend GBP UCTIS ETF (LSE: IUKD). This fund aims to replicate the return in the FTSE UK Dividend + Index by investing in the 50 firms with the highest dividend yields in the FTSE 350.

It has a low expense ratio of 0.40%, good trading volume, and is large in size. Looking at the holdings shows just how well it’s diversified across industry sectors. For example, established, well-known names like HSBC, GlaxoSmithKline, and Vodafone are just a few of the largest holdings. 

This investment will pay me a regular dividend at certain intervals throughout the year and there is also the potential of price appreciation.

One of the main risks of a high-yield fund like this is the dividend trap. This is where the dividend isn’t sustainable because the underlying business is not good.

Some high dividend-paying companies will be established, successful firms that are great at generating free cash flows. However, some will feel they have to maintain high dividends to keep their investors happy when the underlying business is in difficulty. In the long run, the value of these companies is likely to fall and this could hurt the ETF’s long-term performance.

That said, there’s a 5% cap on any individual holding in the fund. This should provide resilience in case any single company significantly underperforms.

Should I invest?

The current dividend yield is 5.78%, which is paid quarterly. Though it’s less than some of the best dividend payers in the FTSE 350, it’s good enough for my own portfolio. The trade-off is that I’m forgoing some potential return for having the diversity of the fund rather than an individual share.

The fund is also rebalanced on a semi-annual basis as the index updates. In theory, this means that the ETF automatically updates with the companies with the highest returns. Rather than buying and selling shares in individual companies myself, this does it for me.

The price action of iShares FTSE UK Dividend GBP UCTIS ETF is also encouraging. Over 12 months it has climbed by around 20% and year-to-date, it has seen a rise of almost 2%. I’m hoping for a further increase during the remainder of the year, since any further rises in interest rates could see money flowing into dividend-paying stocks like the ones held in this ETF.

Though in investing nothing is certain, I think this is a great investment to buy and hold to earn passive income. Therefore, I’m going to seriously contemplate adding this FTSE 350 ETF to my holdings as part of a balanced portfolio.

Niki Jerath does not own any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline, HSBC Holdings, 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.