Investment trust Smithson (LSE: SSON) has endured a difficult few weeks. By last Friday’s close, the FTSE 250 constituent had seen its share price fall a little over 14% since the start of 2022. As a holder, I’ve become pretty philosophical about it all. Let me explain why.

Great start

Don’t mistake me for some kind of stock market masochist. No one actually enjoys seeing the value of the biggest holding in their Self-Invested Personal Pension (SIPP) fall by a double-digit percentage. In fact, Smithson’s decline has the potential to hurt more than most. given that investors like me have been spoiled by performance for the majority of its existence. 

The small- and mid-cap-focused fund was launched back in October 2018. No doubt helped by its link to star money manager Terry Smith (Smithson comes from the Fundsmith stable and adopts the same strategy), investors were queueing up to throw their money in the ring. And up until recently, this confidence has been richly rewarded. 

From inception to the end of 2021, the trust delivered an annualised gain of 24.5%. That compares very favourably to the 13% achieved by its benchmark — the MSCI World SMID Index. It also more than justified the 0.9% annual management charge, in my opinion.

What’s gone wrong?

The recent wobble may be due to a number of things. First, there’s the issue of valuation. As a quality-focused fund, Smithson doesn’t look for cheap stocks.

Like its big brother, Fundsmith Equity, it targets companies with valuable brands and huge market shares that generate consistently high returns on the money they put to work. This includes property website Rightmove, mixer-drinks supplier Fevertree Drinks and Domino’s Pizza Group. Unfortunately, such businesses are rarely without friends and priced accordingly. That’s fine when markets are behaving themselves. Less so when investors are fretting over earlier-than-expected interest rate rises.

The fact that almost half of Smithson’s portfolio comes from the IT sector probably doesn’t help either. By sharp contrast to last year, companies in this space have now fallen out of favour. Thankfully, Smithson makes a point of avoiding the unprofitable fluff whose share prices are now falling faster than Boris Johnson’s approval ratings. Nevertheless, investors seem to be throwing the baby out with the bathwater.

The aforementioned performance of its shares may have also seen a few profit-takers emerge from the shadows. After all, Smithson’s market-cap had grown to £3.5bn by the end of December. That’s already pretty large for a trust that is designed to invest in companies lower down the food chain. In fact, the median size of business in the portfolio is actually £10bn! Moreover, manager Simon Barnard’s investment strategy is still to be comprehensively tested and some people may be getting out while the going’s good.

Loading up for the recovery

While I wouldn’t mind being proven wrong, I certainly don’t expect Smithson’s annualised return to remain at the percentage it stood at in December. As a fuss-free way of accessing high-quality businesses from around the developed world however, it still strikes me as a perfect core holding.

I believe that good businesses tend to outlive bad ones. I also regard myself as a long-term growth investor. As such, it makes sense for me not to panic about Smithson’s sticky patch just yet.

Paul Summers owns shares in Smithson Investment Trust and Fundsmith Equity. The Motley Fool UK has recommended Dominos Pizza, Fevertree Drinks, and Rightmove. 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 FTSE 100 finished down 1.2% on Friday. That came as stock markets around the world plummeted, with investors clearly concerned. One of the main drivers has been a move out of growth stocks. This is particularly in technology as some of these stocks’ lofty valuations are called into question. Yet even if we see this move lower continuing in weeks to come, I can still identify some top stocks that should outperform the index as an average.

Making notes on value stocks

There are a few areas that I look to when the situation in the market isn’t great. As a general sector, I always consider adding more value-driven stocks. Value stocks are often mature companies that have a share price below their fundamental value. These might not offer as exciting returns as growth stocks, but any disconnect to the long-term fair price can represent a buying opportunity.

For example, both Barclays and B&M European Value Retail fell over 8% last week. As a top tier global bank, I think that Barclays shares should have recovered and added gains when I consider a one year or longer time horizon. The probability of several rate hikes from the Bank of England this year should act as boost.

B&M European Value Retail operates a range of price-driven stores in the UK and abroad. The January trading update was positive, and the nature of the business means that I wouldn’t expect demand to fall suddenly, even if the economy started to underperform. So given the fall in the short term, I think it looks a good buy.

Of course, a risk with value stocks is that the share prices can remain deflated for a long time before recovering.

Adding defensive options

Apart from the top value stocks mentioned above, I can also consider consumer defensive stocks. As a note, these aren’t mutually exclusive categories. I might find a good consumer defensive stock that also is a value stock. 

Consumer defensives are those that shouldn’t be overly impacted by the state of the economy. They typically provide services or offer products that are necessities or as basic goods. Within the FTSE 100, this includes Kingfisher and J Sainsbury. 

Kingfisher operate hardware stores, selling everything from nails to garden equipment. I think it’s a smart buy if I’m concerned about the prospect of a market crash coming up. J Sainsbury is a well-known supermarket chain. I think we’d all agree that I’ll probably continue shopping at my local Sainsbury’s (if I haven’t already switched to Aldi or Lidl) for bread and milk, regardless of my economic fortunes.

Expectations for my top stocks

Even though I think the four options are sound, I’m realistic about the share price performances. If we do see a situation where the FTSE 100 falls by 20%-30% in a short period, it’s unlikely the four stocks will give me a positive return. However, the losses could be smaller than the FTSE 100 average. Further, unlike some growth stocks that could be overvalued even after a crash, I think these top stocks will move higher to reflect long-term demand as the market recovers.

I can’t predict if a market crash will come soon or not, but regardless of that, I’m considering buying all four of them for my portfolio.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended B&M European Value and Barclays. 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 FTSE 100 index is full of dividend gems right now. The stock with the highest dividend yield, Evraz, has huge returns of 16%. And if I consider special dividends, it has been even better. We have a winner in Tesco, with a yield of almost 21% last year! But here is the catch. I cannot be sure if I could continue to earn high dividends from these stocks. In the case of Tesco, that is obvious. Its last big payout was a special one-time dividend, which bumped up its yield. But even in the case of Evraz, the future looks a bit shaky to me. I mean, we are expecting a slowdown in commodities this year. So it follows that its dividends could be slashed. 

A FTSE 100 stock for reliable passive income

If I would like to earn a reliable passive income for a long time, I think it would be a good idea to consider stocks that are more likely to give me continuous returns rather than big one-off payouts. And this holds even if their current dividend yield is underwhelming. Over the years, the dividends could keep rising and so would the dividend yield on my initial investment, which is nothing but the dividend amount as a percentage of the share price. 

Take the case of London Stock Exchange (LSE: LSEG). The stock has a present yield of just 1%, which is significantly below that of the average FTSE 100 stock at 3.4%. However, if I had bought the stock 10 years ago, the dividend yield on my investment would be a much bigger 9.5% today. And that gives me solid real returns even accounting for the 4% expected inflation level for 2022 in the UK.

London Stock Exchange’s meteoric share price rise

Moreover, LSE is a very good growth stock. In the last 10 years, its share price has risen by almost 10 times. And this is even after the fact that over the past year, the stock has tumbled fast. Of course, it goes without saying that past growth in the stock price might not indicate what happens in the future. This is especially true of the stock right now. Investors are jittery after its massive acquisition of data analytics provider Refinitiv, which has also led to a decline in its price. 

But at the same time, I cannot overlook the fact that London Stock Exchange has not just performed well in terms of its share price increase, but its financial performance has been largely good over time. This gives me confidence, because it shows a company that knows how to grow. And while there is no doubt that I would like to keep a watch on how the Refinitiv acquisition works out, the company’s management has earned my faith as an investor because of its past performance. 

What I’d do

The FTSE 100 stock has long been on my investing wishlist, and 2022 is the year when I intend to make it part of my portfolio, both to earn a passive income and for growth in my capital. 

Manika Premsingh 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.

Stock markets have been falling recently, particularly in the US. But even so, I was surprised to see the Walt Disney (NYSE: DIS) share price fall by almost 7% on Friday. There was no company news on the day, and the next quarterly earnings isn’t released until 9 February.

However, it was the read-across from Netflix that weakened the Disney share price. Netflix, the mega-cap streaming service, released its fourth-quarter earnings, which caused the stock to tank by 22%. The primary reason for the fall was the company’s weak new subscriber Q1 forecast of 2.5m. It was much lower than the 5.7m that analysts expected.

This is where Disney comes in. The company is growing its own streaming service called Disney+. So if Netflix is struggling for new subscribers, Disney+ may be too. But is a 7% fall in the Disney share price really warranted based on Netflix’s forecasts? I’m going to take a look to see if this has presented me with a buying opportunity.

The bull case

Disney has a major ingredient I look for in an investment: an economic moat. Essentially, this is a competitive advantage that makes it harder for competitors to take market share. It can also be thought of as a barrier to entry.

Disney’s economic moat comes from its characters and stories it has built over decades. There’s only one Mickey Mouse, after all. And nowadays Disney also owns brands Star Wars, Marvel and Pixar.

Before the pandemic, Disney was also able to generate a double-digit operating margin and return on its equity. These are the kinds of financial metrics I look for when investing. To me, it represents the strength of Disney’s business, derived from its economic moat.

The bear case

Disney’s business was greatly impacted by the pandemic. It generates a significant proportion of its revenue from its theme parks, which were shut down during lockdowns. The company said its wider Parks, Experiences and Products division suffered $3.5bn in lost operating income due to the closures in one quarter alone. A new strain of Covid cannot be ruled out completely, so this remains a key risk for Disney’s business.

The company is also still in recovery from the pandemic. Net income is forecast to be $5.9bn for fiscal 2022 (the 12 months to 2 October 2022). In fiscal 2019 (so pre-Covid), net income was a much higher $11bn. Analysts are attributing the lower profit guidance to a contraction of margins due to inflation and increased operating costs.

This brings me to the current valuation. Disney’s share price has fallen by 21% over one year. However, the stock is still valued on a forward price-to-earnings (P/E) ratio of 34. Before the March 2020 Covid-related stock market crash, Disney was trading on a P/E of 20. Therefore, the stock still looks richly valued, even after the share price decline.

Should I buy at this Disney share price?

I do think Disney is a quality company with a strong economic moat. It’s a stock I’ve owned before, and would buy again, depending on the balance of risk-to-reward.

However today, I think there’s further downside risk in the share price. The valuation still looks rich, and profits aren’t expected to reach pre-pandemic levels until at least fiscal 2024. I’m keeping it high on my watchlist for now.

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.

My portfolio contains a number of stocks that have large exposures to emerging markets. It’s my opinion that the rapid population growth and fast-growing incomes in such regions could help me make terrific returns. However, I think I should probably bulk up my holdings in companies that operate in Africa, and one way I’m thinking of doing this is by investing in cheap UK stock Airtel Africa (LSE: AAF).

A United Nations study written just before the pandemic reveals how population in half of Africa’s countries will double by 2050. The current make-up of my shares portfolio doesn’t provide me with big exposure to these fast-growing nations. I think Airtel Africa — which provides telecoms and mobile money services in Sub-Saharan nations — could help me redress this balance.

Airtel Africa’s latest financials showed pre-tax profits rising 81.2% in the three months to September. The business is rapidly expanding its business to keep the bottom line soaring, too, and especially its Airtel Money operations. This division has colossal growth opportunities given the low product penetration of financial products in Africa combined with soaring wealth levels there. Recent action on this front included the business obtaining a banking licence in Nigeria at the end of 2021.

Too cheap to miss?

Airtel Africa faces significant competition in its markets from local operators as well as from global leviathans like Vodafone. It will therefore have to row extremely hard to avoid being pushed out. Still, it’s my opinion that this threat is reflected in the telecoms firm’s rock-bottom share price.

Today Airtel Africa trades just above penny stock territory at 143p per share. Consequently it trades on a forward price-to-earnings growth (PEG) ratio of 0.4. Readings below 1 such as this suggests a UK share is undervalued in relation to its earnings prospects.

6.7% dividend yields!

Vistry Group’s (LSE: VTY) another UK share whose low share price belies the possibility of strong and sustained profits growth. This cheap stock trades on a PEG ratio of just 0.6 for 2022. What really grabs my attention, though, is the housebuilder’s terrific value when it comes to income. At current prices of £10.80 per share, the business commands an eye-watering 6.7% dividend yield. Airtel Africa’s 2.7% forward yield is decent but it comes nowhere close to this mammoth reading.

Vistry’s cheapness reflects investor fears that demand for newbuild properties is about to fall sharply.  This isn’t a view that I myself share. Indeed, a recent survey revealed that around one-in-five Brits plan to buy a new property in 2022. With supply remaining in short demand, the likes of Vistry will be needed to make this happen.

I sincerely believe that low mortgage rates and government support for first-time buyers will remain in place for a long time yet, keeping the housing market in very rude health. It’s why I’d buy Vistry, despite the threat posed by rocketing construction costs, and aim to hold it for years to come.

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

Cineworld (LSE: CINE) was one of the worst performing FTSE 250 stocks of 2021. But come 2022, and things seem to be going pretty well for the stock. It is still a penny stock, to be sure. But considering the rise of almost 40% it has seen in the past month, that might just be a thing of the past very soon if the trend continues. 

I am already a Cineworld shareholder, who has long held it with great conviction, even though it has looked like a complete write-off many times during the past year. But even I did not expect this kind of increase and so fast. So I had to ask – what is going on here? 

Cineworld share price rises while FTSE 250 falls

I am particularly curious considering that the FTSE 250 index, of which it is a part, has shown rather muted trends so far in 2022. It has even fallen below 23,000 since mid-January. Moreover, inflation is on the rise too. Cineworld’s biggest market is the US, which saw the biggest inflation print in 40 years recently! Cinemas and entertainment in general is a non-discretionary spend, the kind that’s the first to get slashed out of a household’s budget as prices rise and the real value of disposable income falls. 

In my assessment, the stock price has risen in anticipation of better times ahead. Even though we do not know what might happen next with regards to Covid-19, at least we can be fairly sure that we are on the path to recovery. I think this is reflected in the Cineworld share price too, which had fallen a whole lot in the past year. 

Robust trading update

Cineworld’s latest trading update has boosted the stock further. In December 2021, the company’s revenue rose to 88% of its 2019 levels. Performance in the US is particularly heartening at 91%, though its second largest market of the UK and Ireland is not much farther behind at at 89%. It also said that it has generated positive cash flow in the final quarter of the year, which to me sounds like a sure-shot sign of recovery. Moreover, a slew of promising films is expected to release this year, which could further reinforce its performance. 

What I’d do

In sum, it appears that there are still drags on the Cineworld share price. But there are also factors pushing it forward. In fact, even big risks like inflation might not impact the stock right now as it is a relatively low-cost entertainment expense compared to, say, taking a holiday. Only if inflation rises so much that it results in an economic slowdown would it impact the stock. And with all the policy tools we have, I would be very surprised if that happened. 

My point is, that I am still quite optimistic about the Cineworld stock even with the risks to it. I am holding it for now, and would probably even have bought it now, if I had not already. 

Manika Premsingh owns Cineworld Group. 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.

Investing in dividend stocks can be a great way to generate passive income. These stocks pay investors regular cash payments for doing absolutely nothing.

Here, I’m going to explain how I’d build a portfolio of UK dividend stocks that’s potentially capable of generating £5,000 per year in passive income for me. These are the steps I’d take to build a rock-solid, income-generating portfolio.

Finding the best dividend stocks for passive income

The first thing I’d do, if my goal was to generate £5k of passive income per year from dividend stocks, is screen the UK market for stocks with attractive yields. I’d do this with a stock screening tool.

When I say ‘attractive’, I’m referring to yields that are higher than 2% but lower than 6.5%. The reason I’d cap my yield at 6.5% is that a super-high yield is often a sign that the company is in financial distress and that its dividend payout isn’t sustainable. What’s happened is that the ‘smart money’ has already dumped the stock, pushing its share price down and its yield up.

Reliable dividend payers

Once I had a list of dividend stocks at hand, I’d then pick out the most reliable dividend payers. I’d do this by looking at companies’ dividend track records. Businesses can cut, suspend, and cancel their dividends at any time so I’d want to find those that I can depend on for passive income. 

It’s worth pointing out here that there are a number of companies in the UK that have exceptional long-term dividend track records. Unilever, Diageo, Sage, and Smith & Nephew are some good examples.

Dividend growth potential

With my list of reliable dividend payers, I’d then look for companies with long-term growth prospects that have the potential to raise their dividend payouts over time. Rising dividends would help me offset inflation.

Attractive valuations

Finally, I’d look for companies that trade at reasonable valuations. I wouldn’t want to pay an excessive valuation for a company as this could potentially result in share price losses.

One example of a dividend stock that I think trades at an attractive valuation at present is Unilever. It currently sports a forward-looking price-to-earnings (P/E) ratio of about 16.7. This is not high, in my view, given the company’s track record and long-term growth potential.

Building a passive income portfolio

Once I had a list of top dividend stocks, I’d then put together a portfolio of around 20 companies. I’d pick stocks from a number of different sectors including consumer staples, healthcare, and technology in order to ensure that the portfolio is well diversified.

In terms of yield, I’d aim to pick up an average portfolio yield of around 4%. I think that’s very achievable in today’s market. With a 4% yield, I would need to invest a total of £125,000 to generate £5,000 in passive income.

Tax-free income

I’ll point out that I’d try to invest as much as possible in tax-efficient accounts in order to pay as little tax as possible on my passive income. A Stocks and Shares ISA is a good example of a tax-efficient account. With this kind of investment account, all capital gains and income are sheltered from the taxman.

If I was able to generate £5k in passive income in an ISA, it would be entirely tax-free.

Edward Sheldon owns Diageo, Sage Group, Smith & Nephew, and Unilever. The Motley Fool UK has recommended Diageo, Sage Group, Smith & Nephew, 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.

An ETF (exchange-traded fund) is a fund that tracks an index or sector and can be bought and sold like a share through most online brokers and are usually low-cost. I’m a fan of them as they allow me to diversify my holdings cheaply, that is, investing in multiple companies by holding a single stock.

I’m now looking at two ETF picks for my portfolio that could have fantastic growth prospects for 2022.

Pick 1

iShares S&P Commodity Producers Oil & Gas UCITS ETF (LSE:SPOG). The oil and gas sector rallied strongly last year. This particular fund was one of the best performing ETFs of 2021 in that area, increasing by around 70% during the course of the year.

The iShares S&P Commodity Producers Oil & Gas UCITS ETF aims to track the S&P Commodity Producers Oil & Gas Exploration & Production Index.

This measures the performance of some of the largest publicly traded firms involved in oil and gas extraction and development from around the world. US and Canadian energy giants dominate the index, comprising almost 80%. There are five companies from the UK on the list, but these represent less than 2% of the overall holdings.

The fund is already performing well this year, up by 12% year-to-date. Although nothing is certain in investing and a fall in energy prices will certainly hurt this ETF, it’s now looking probable that the price of oil is set to rise. This is likely to have a further positive impact on the earnings of these companies. If this trend in energy prices continues, it’s likely iShares S&P Commodity Producers Oil & Gas UCITS ETF will have another fantastic year.

Pick 2 

iShares FTSE 100 (LSE:ISF). In 2021, the FTSE 100 posted its best year since 2016. Looking ahead into 2022, I’m feeling bullish about the Footsie again.

Within my own portfolio, I’ve owned iShares FTSE 100 for some time now. I think it offers me the best access to the FTSE 100 as a whole since it allows me to own all the companies in the index by just holding one share.

Over 12 months, this ETF has increased by around 11%. However, despite a strong start to the year, at the time of writing it has seen a pullback and is currently sitting about flat for the year. This shows that there are headwinds for the FTSE 100 and therefore this fund. Continuing supply-side disruptions and rising interest rates could weigh on possible returns.

However, I’m generally optimistic about iShares FTSE 100 for two main reasons. First, we have some of the highest Covid vaccination rates in the world. As our economy fully opens up, the earnings of these companies should rise. Second, the index is rich in firms operating in sectors that could surge this year such as banking and energy.

For example, HSBC has already seen an increase in its value this year. If interest rates rise further in response to higher inflation, then its share price should benefit. Similarly, BP has also had a good start to the year and if energy prices continue to rise, this should translate into higher earnings.

On balance, I think that this ETF could deliver sizeable gains for my portfolio over the coming year.

Niki Jerath owns shares in iShares FTSE 100. 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.

Oil prices continue to soar. In recent hours, Brent Crude rocketed to seven-year highs, just below $89 per barrel, on fresh supply worries. This, combined with improving demand forecasts as the Omicron threat recedes, could continue to push black gold prices to the stars. Goldman Sachs now thinks a move through $100 is an inevitability.

It’s not a shock to see investor interest in FTSE 100 oil majors like BP (LSE: BP) take off as a consequence. BP’s share price has just popped through the 400p per share marker for the first time since February 2020.

Yet despite these recent gains, BP still seems to offer terrific value for money. A price-to-earnings (P/E) ratio of 7.6 times for 2022 sits well below the widely-regarded bargain benchmark of 10 times. Its dividend yield meanwhile comes in at a meaty 4.2%.

Why the oil price rally could end

I have serious reservations about investing in BP however. Energy prices are soaring today but fresh trouble in the battle against Covid-19 could send them tumbling again.

Let’s not forget the public health crisis is far from finished. Rocketing global inflation and China’s teetering real estate sector are additional threats to the economic recovery that could pull prices lower again.

On top of this, energy values could suffer a sharp turnaround if producers continue to hurriedly raise output. The number of US rigs in operation has risen in four of the last five weeks, according to Baker Hughes.

In fact the number of working oil and gas rigs last week rose at their fastest pace since April. It’s possible that oil prices could start reflecting speculation that declining stockpiles might begin to build strongly again.

The green revolution

As a long-term investor, I prefer to think about what a company’s share price will be doing in several years time. Unfortunately, in the case of BP, I think the spectre of massive oversupply looms dominates its outlook for the next 10 years.

Massive fossil fuel investment in recent years looks set to  yield fruit sooner rather than later too. In the US, for example, the Energy Information Administration has tipped annual production to hit record highs of 12.4m barrels a day in 2023.

Huge spending by other major oil producers like Canada, Brazil and Norway also threatens to drown the market with excess oil.

In another worrying development, soaring investment in green technologies threatens to sink crude demand as the decade progresses. People are shunning gas-guzzling cars and buying electric vehicles at a jaw-dropping rate. At the same time, demand for renewable energy is rising sharply as concerns over the climate crisis worsen.

BP is taking steps to improve its own green credentials to address this long-term threat. This week, for instance, it signed a deal with Oman to explore building multiple gigawatts of electricity from wind, solar and green hydrogen projects by 2030. But BP’s exposure to low-carbon energy remains meagre and it has a long way (and a lot of money to spend) to catch up.

A better FTSE 100 stock to buy?

I believe Tesco (LSE: TSCO) could prove a better FTSE 100 share to buy than BP. Okay, its heyday of the early 2000s might be over, a time when £1 of every £8 spent in the UK found its way into the company’s tills.

But the business still sits at the top of the country’s grocery industry, has the clout and, thanks to its long-running Clubcard reward scheme, a large and loyal customer base to fall back on.

I also like Tesco because of the strength of its online offering. It has the best delivery operation in the business and vast investment here since the beginning of the pandemic has boosted its strength.

This puts Tesco in great shape to exploit the fast-growing online grocery segment. Analysts at IGD think this segment could be worth £26.9bn by 2026, up £4.7bn from last year’s levels.

Rising competition

That said, Tesco also faces significant problems of its own. Supply chain problems for example threaten to remain a long-term problem as post-Brexit customs changes come into effect. A smaller pool of workers to draw on due to tightening immigration rules also threatens to drive up costs and cause disruption.

My main fear for Tesco however, comes as its competitors expand rapidly to grab its customers. All of its established rivals including Sainsbury’s and Morrisons now operate sophisticated online operations of their own. US retail giant Amazon has also dipped its toe in the water in the UK, and German discounter Aldi now operates a ‘click and collect’ service of its own.

The danger posed by Aldi and its German counterpart Lidl are particularly concerning to me. Their rapid store rollouts come at a time when value is becoming increasingly important to British consumers.

IGD expects discounts to be the fastest-growing part of the grocery market in the years ahead. They think it’ll be worth £34.4bn by 2026, up £6.6bn from 2021. News that inflation in the UK has hit 30-year highs could hasten the flow from Tesco to these low-cost retailers too.

Should I buy Tesco shares?

Just like BP, Tesco’s share price also seems to offer excellent value on paper. The retailer trades on a forward price-to-earnings growth (PEG) ratio of 0.2, comfortably below the watermark of 1 that suggests a stock could be undervalued. However, this low valuation reflects the colossal (and growing) long-term threats to Tesco’s profits.

There are plenty of other cheap UK and US for me to choose from today. So I won’t be taking a risk by buying Tesco or BP.

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

Earning a steady passive income is one of my investing goals. It allows me to build up another income stream from my earned income. And importantly, it could support me post-retirement, which is something that we could start planning for the day we start earning, in my view. In this article, I look at the best way for me to earn a passive income in 2022. 

Why 2022 is a good year to start investing

I think 2022 is a particularly good time to start investing for a passive income, because dividend yields are set to improve. According to recent research by AJ Bell, dividend yields of FTSE 100 stocks could rise to 4.1% this year, up from 3.4% at present. And going by the fact that economic recovery is only expected to continue in the foreseeable future, I am optimistic about dividends for the medium term as well. 

How much do I need to invest?

Consider for instance, the stock with the biggest dividend yield. I am talking about the FTSE 100 miner Evraz, which has an almost 16% yield. I need to invest just over £6,250 to earn £1,000 in passive income from the stock. That sounds like a pretty sweet deal to me. But here is the catch. I cannot just put my money in the stock and expect to earn my targeted amount every month. 

Mining dividends have gone through the roof in the past year because of an unexpected boom in industrial metal and other commodity prices in the past year. These are expected to cool off this year and I expect that dividends could decline along as well. This means that I have one of two options. I can actively manage my investments and switch to better options when I get the chance. Alternatively, I could invest in a bunch of stocks with the expectation of a lower yield, but one that is more predictable. 

If I invest in the average FTSE 100 stock, as mentioned above, I could expect to receive around a 4% yield. But to make £1,000 in passive income from this, I would have to invest £25,000. This is four times the amount I have to invest if I were to buy the stock with the biggest dividend yield today!  Even with all its risks, the first option sounds much better than this. But I do have a third alternative if I look hard enough. 

My best alternative

I could carefully select from a combination of stocks that could give me decent yields and for some time to come. From utilities to miners and everything in between, I think I could manage a yield of around 7% at least. This would entail an investment of around £14,500, which is somewhere between the two extremes. It goes without saying that even with this investment it would pay to keep regular track of where my money is going. But perhaps I would not need to be as watchful as when I am investing in only one high-yielding stock. 

Manika Premsingh owns Evraz. 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.