As a holder of shares in Scottish Mortgage Investment Trust (LSE: SMT), I won’t pretend that the last few weeks have been pleasant. Rather than ruminate on lost gains, I’ve decided to make lemonade out of lemons and increase my holding. Allow me to explain why.  

Why has SMT fallen?

As I type, the share price of the FTSE 100-listed fund has tumbled almost 13% since 2022 started. It’s not hard to see why. Concerns over earlier-than-expected hikes to interest rates in the US have pushed investors to dump frothy growth stocks in favour of more reasonably-valued companies.

Unfortunately, SMT’s portfolio is chock-full of the former. Shares in pharma giant Moderna, semi-conductor supplier ASML and electric vehicle poster boy Tesla are down 29%, 11% and 17% respectively.

There’s a possibility things could get worse before they get better as we enter the end game of the pandemic. Airlines, hotels and holiday firms will be back in demand. That’s regardless of whether they’re fundamentally good businesses or not. Rising interest rates will do the same for banking shares. 

Another reason why some investors may be cautious about SMT’s outlook is that James Anderson’s departure date (30 April) is approaching. Having done so well for holders during his tenure, the loss of SMT’s co-manager is bound to make some jittery. 

Staying bullish

For me, the question as to whether Scottish Mortgage Investment Trust is a good investment now depends less on the fund itself and more on the investor considering it.

The fact is, SMT’s managers have already proven themselves to be canny stock-pickers. At the time of writing, the FTSE 100 member’s share price is up 228% in the last five years. Contrast this with the 13% return generated by its index (excluding dividends).

I think that more than justifies the former’s 0.34% ongoing charge. It’s also worth highlighting that co-manager Tom Slater is staying on after Anderson leaves. 

Yes, past performance is no indication of future performance. But nor should it be ignored. If I believe that tapping into disruptive companies as early as possible can lead to stellar returns (hint: I do), then continuing to throw my money at Baillie Gifford’s highly-successful flagship fund still makes sense. This is especially as it gives me access to private businesses I’d otherwise struggle to own. 

No, the question I’ve been asking over the past few weeks is whether buying now makes sense given my investing horizon. Since I believe (hope) the latter consists of several decades rather than a few months, I’ve come to the conclusion that it does.

That’s it. No fancy calculations. No dwelling on paying a premium or discount to the net asset value. No obsessing over inflation. Reckless? I actually think this strategy is pretty rational, although I would say that! 

Long term buy-and-hold

I fully intend to keep investing in SMT. That’s even if the share price continues to be volatile. Things get a lot less stressful when I remember that what happens in 2022 really doesn’t matter. Traders may feel differently, of course. 

Sure, it’s wise to remain appropriately diversified. However, I’m more confident that my holding will generate better returns than cheaper (poorer) constituents of the FTSE 100 over the long term. The same goes for this recently-battered but high-quality FTSE 250 stock.

Value is back in fashion, but fashion is notoriously fickle.

Paul Summers owns shares in Scottish Mortgage Investment 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.

The FTSE 100 index has picked up speed in the past month. And this is showing up in the stock prices of individual companies as well. Like the multi-commodity miner Anglo American (LSE: AAL). In the last month alone, the stock was up almost 20% at the close on 20 Jan! It was always a good stock, but this much increase is something else, if you ask me. 

My journey since buying Anglo American shares

I had bought the stock in 2021, when miners’ prices had started declining. It seemed like the perfect opportunity for me to buy the stock. It had just come-off after rising to fresh multi-year highs and in my analysis, it was quite clear that the stock could just rise more. This was shortly after forecasts for industrial metal prices were cut, as China pulled back from its massive public spending and the global economic recovery appeared uncertain too. So before it started rising, there were a few months of agonising as the stock dipped further. But then in December 2021, it started rising again and now I am sitting on some nice gains. 

Comparison with Glencore

And here is the best part. I do not think the stock is done rising yet. Consider this. It is trading at a price-to-earnings (P/E) ratio of less than nine times, when the FTSE 100’s P/E is 18 times. And its peer Glencore, the Swiss miner and commodity marketer, has a P/E of a huge 38 times. 

Now, there are bound to be differences in individual companies’ profiles. For instance, Glencore’s earnings and dividends are expected to rise in 2022, while Anglo American’s could slow down. Even then, though, I am not convinced there should be such a gaping difference between the two in terms of price. Also, it is always essential to remember that forecasts are always subject to change, so the outlook could change quite soon depending on evolving circumstances. 

Nice dividends for the FTSE 100 stock

In any case, I think even with the expected dividend decline, the Anglo American dividend could continue to look good. At present, it has a dividend yield of 6.5%. But at today’s prices, its 2022 dividend yield would be around 4.2%. While this is a come-off from the present levels, it would still be slightly higher than the average expected FTSE 100 yield of 4.1% in 2022. 

What I’d do

It is not like the stock’s price rise is guaranteed, though. The world is still in an uncertain place as far as the coronavirus is concerned. The economic recovery is a bit underwhelming, which could hold back metal prices further. And inflation is on the rise, which could slow down not just consumer demand but also growth in the stock markets, impacting all stocks as a result. But these are all risks that may or may not play out. On the other hand, I am quite confident that Anglo American will stay a growing and profit-making company. I think its prospects look good and I intend to stay invested, if not buy more of it. 

Manika Premsingh owns Anglo American. 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.

One of the strategies some very successful investors use is identifying the ‘next big thing’ and then investing in shares that could benefit from it. Right now, many people think alternative energy sources could be a massive emerging business area. Lithium may have a role to play in that as it is a key component in batteries for things like electric vehicles. So, does it make sense for me to buy lithium shares for my portfolio in 2022?

Buying an industry versus buying a company

First I think it is helpful to understand that in an emerging industry, not all companies will be winners. In fact, often there are fewer winners in an emerging industry than an established one.

Once an industry is well-established and profitable, it often supports only a few large companies with proven business models. In the early days, though, there are often dozens or hundreds of companies hoping to stake a claim in the new industry. Many, or even most, may be doomed to failure. That was the story of railway mania in Victorian Britain. It was also the story of the dotcom crash in the US. It could yet turn out to be the story of lithium. Some huge winners could emerge. But there may be hundreds of losers, too.

So if I wanted to invest in lithium shares, I would focus on understanding what a particular company’s source of sustainable competitive advantage might be. For example, does it have exclusive rights to an attractive area in which it can mine lithium? Does it have proprietary technology or processes that can help differentiate its lithium from that of other producers?

Diversification and lithium shares

I would also apply the same principles I use when considering companies in other, more established areas of business. For example, compare Rio Tinto and Zinnwald Lithium. Rio is a huge, established miner. It is growing its lithium footprint and last year purchased a big project in Argentina. But for now at least, lithium is set to be a rounding error for Rio, which last year reported total revenues of around £33bn. By contrast, Zinnwald is focussed on a single lithium project in Germany. Last year it had no revenue.

If I just wanted exposure to lithium, Zinnwald might seem to offer me the better choice due to its sharper focus. But its risk profile is very different to Rio Tinto’s. If one project disappoints – which is common in mining – it may just be a blip in Rio’s accounts. For Zinnwald, it could possibly undermine the whole company’s existence.

My approach in 2022

I do see potential in lithium this year and beyond. I would consider buying lithium shares in 2022. But when making any decisions about whether to buy, I will apply the same investment principles I use when buying other shares for my portfolio.

As an investor, diversification is a critical tool I use to reduce my risk. New industries are inherently risky. Intense competition can push up costs as companies outbid each other for the same scarce equipment. But even in a new industry, I still seek to diversify my investments. If I do decide to buy lithium shares in 2022, I will not buy them in any company whose hopes are pinned on a single lithium mine.

Christopher Ruane 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.

Cineworld (LSE: CINE) shares have climbed over 30% in value since the start of 2022. That’s not something I can ignore, especially as I’ve been bearish on the company for as long as I can remember.

Does the stock’s resurgence over recent weeks mean it’s now far too cheap and that there’s money to be made? Possibly. That said, there’s another company I’d be far more interested in buying right now.

Cineworld shares: Mission Impossible?

To be fair, Cineworld’s last update was actually better than I expected. Attendances had “steadily grown” over the six months to the end of 2021, no doubt boosted by the release of the long-awaited No Time to Die. The latest Spider-Man movie has also helped to improve revenue, allowing the company to generate positive cash flow again. 

The forthcoming slate of movies should build on this momentum. The new Batman film, releasing in March, Jurassic Park: Dominion, out in June, and Mission: Impossible 7, debuting in September, should be nailed-on blockbusters. The removal of Plan B restrictions in the UK, including the requirement to wear face masks, could/should prove another shot in the arm for Cineworld shares. 

But let’s be sensible. When it comes down to it, the odds of this business thriving again aren’t great. Even if Cineworld is successful in its appeal against the legal case it recently lost against Cineplex, the sheer amount of debt on the company’s books is a huge reason to steer clear.

The fact that it’s still the most heavily shorted stock on the entire UK stock market is another. Now throw in the competition it faces from streaming services. Speaking of which… 

Taking the Mickey 

If I were to buy a recovery play in the entertainment space right now, it would be US giant Disney (NYSE: DIS). Priced at a just over $200 a pop last March, the stock now changes hands for under $150. 

Reasons for this weakness include a slowing of growth at its streaming platform. Last November, Disney+ announced it had added 2.1 million subscribers in Q4 of its financial year. That’s down sharply from the 12.6 million in the previous three months.

But should investors really be surprised? Having (unintentionally) timed the launch of Disney+ perfectly to coincide with Covid-19 lockdowns, it was surely inevitable that things would slow.

Yes, a few poorly-received recent Marvel and Star Wars shows may be another factor. However, we can’t deny just how lucrative this intellectual property is and, importantly, will remain. Pixar is another jewel.

For me however, its the theme parks that make Disney a buy. If the pandemic really is to end in 2022, visitor numbers should begin to rise again as international travel bounces back. Sure, a bet on Cineworld could be more lucrative in the event of a short ‘squeeze’. However, I suspect the ride with Disney stock will be considerably less hair-raising.

High-risk stock

In sum, I’d much rather add Mickey and Co to my portfolio when markets reopen on Monday. As nice as it would have been to capture the recent jump on Cineworld shares, I’m still aiming my barge pole at the company.

This is a binary bet as I see it and the prospects for long-term investors, as opposed to nimble traders, aren’t great. 

Full-year numbers — including an update on its precarious financial position — will arrive in mid-March. 

Paul Summers 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.

Dividend shares are an excellent source of passive income in my Stocks and Shares ISA. Many UK shares offer a dividend payment, but they differ in yield and reliability. Some companies choose not to pay shareholders in the form of dividends as they may prefer to reinvest profits to grow the business. That’s okay. Every company has a different policy.

I own both growth shares and dividend shares in my own portfolio.

Dividend shares – my criteria

When I’m looking for dividend shares there are some criteria that I’d like to fulfil. For instance, I look for companies that offer a dividend yield of over 6%. I also ignore companies where the dividend yield looks too high. For example, a dividend yield of 14% might be unsustainable and there are risks that the payment could be cut. It’s also one reason why I look at the dividend cover. This shows me how well the dividend payments are covered by earnings. If it’s less than one, then there could be risks the current level of dividends is unsustainable.

Another point of comfort is the number of years a company has paid out dividends. I’d view a company as a reliable dividend payer if it has paid out for at least the last five years.

Next, I’d like to see reasonably growing earnings and reasonable forecasts for the upcoming five years. Neither historical figures nor forecasts is a guaranteed predictor of the future, but it does provide another layer of comfort for me.

Which dividend shares?

So which high-yield dividend shares would I buy now? Currently I’m keen on Rio Tinto (LSE:RIO). This FTSE 100 metals and mining giant offers an 8% dividend yield and has a decade-long history of payments. Dividends are well-covered by earnings. And earnings are expected to grow over the coming years. That being said, most of its business is correlated with iron ore prices. There are multiple factors that determine commodity price movements, so Rio’s share price can be somewhat volatile. However, I reckon it’ll provide a hedge against potentially rising inflation. Overall, including share price return and dividend payments, it has returned an annualised 17% over the past five years. I reckon that’s pretty good and would be keen to add it to my ISA.

Building the pot

Next, I’ve got housebuilder Persimmon (LSE:PSN) on my watchlist. Like Rio, it offers a relatively generous dividend of 9%. This may seem high, but Persimmon is highly cash-generative and has a history of operating a shareholder-friendly dividend policy. The dividend is reasonably covered by earnings, and Persimmon offers earnings growth. There is a structural shortage of homes in the UK, and Persimmon is well-placed to supply this growing demand for many years.

That said, interest rates are more likely to rise than fall over the coming years. Potentially that could lower the amount that new home buyers can borrow.

Over the past five years, Persimmon’s total shareholder return has been 13% per year on average. That’s pretty good I reckon. Its share price has drifted slightly lower of the past year, but I reckon that provides an opportunity for me to buy these quality shares at a discount.

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

Key points

• Hydrogen is one of the most exciting green energy technologies
• There are three companies on the London market specialising in hydrogen technology
• One stock has brighter prospects than the others

I think the hydrogen market is one of the most captivating green energy industries. The potential for this technology is massive, but it is still in its early stages of development.

Producing hydrogen, especially green hydrogen, which uses renewable energy, is costly. Companies are constructing facilities to increase economies of scale and push down costs, but it will take years for the cost of technology to rival cheaper hydrocarbon. 

Still, a handful of UK companies are working on developing technology to help the commercialisation process. And I think each one looks attractive for different reasons. 

Green energy stocks

There are three companies specialising in hydrogen technology on the London market. These are ITM Power (LSE: ITM), Ceres Power (LSE: CWR) and AFC Energy (LSE: AFC). Each targets a different section of the market, and each is at a different stage in its journey. 

However, all of these organisations are early-stage businesses. This makes them riskier than other corporations. Not only are they trying to develop and commercialise an experimental technology, but they also have limited resources.

Although they have raised money from the market in the past, their ability to attract further funding should not be taken for granted. Running out of cash is probably the biggest threat to their success. As such, there should be a warning label attached to these investments. They are certainly not suitable for the faint of heart. 

Still, I think it would be silly for me to overlook the potential for these companies, considering the growing size of the green energy industry.

Hydrogen potential

Each one of these companies has different qualities. Ceres recently reported a 44% increase in revenues for 2021. It is expecting further growth in the year ahead as major commercial partners continue to place orders for its hydrogen-based solid oxide fuel cell (SOFC) technology. 

ITM’s sales are lagging behind those of its peers, and the corporation has been under pressure recently for its lack of growth. While it has found buyers for its electrolyser technology, it still has a lot to prove.

In my opinion, AFC Energy has made the most progress. Last year, the company unveiled a hydrogen fuel cell charging system at the Extreme E racing series.

The self-contained system produces green hydrogen from a shipping container-sized facility. It is attracting a lot of interest. The enterprise has already received an order from Swiss partner ABB for a 200kW hydrogen fuel cell charging system, based on a similar design. 

I am most excited about this technology being pioneered by AFC. The company is making concrete progress in developing its technology, and it is receiving a lot of publicity as a result. As such, I would buy the corporation as a speculative investment.

ITM and Ceres are yet to convince me they have a unique product that can capture market share. So I would avoid these companies. 

On the other hand, I think AFC has the potential to revolutionise the electric vehicle market over the next couple of years. 

Rupert Hargreaves 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.

The one big macro risk to investing in 2022 for me is inflation. The latest inflation numbers continue to look uncomfortably high, and forecasts do not offer much respite either. I expect FTSE 100 companies’ updates to talk of inflation far more than they did in 2021, which was a fair bit already. This could create some stock market uncertainty. But I think even that might be less of problem than the rise in cost of living because of higher prices. And this is where passive income comes in. 

Passive income is a buffer against rising inflation

In December 2021, the UK’s headline inflation grew by a huge 5.4% on a year-on-year basis. In comparison, average earnings grew by 3.5% during the month. This means that rising prices have already outstripped wage growth, and I reckon we have probably not even seen the worst of inflation yet. In effect this is saying that earned income is now officially buying me less than it was earlier. If I want to maintain my standard of living now, I need to find alternative sources of income. And dividend income could well be one way of doing so. 

It is quite fortunate I believe at this time that FTSE 100 dividends are on the rise. Economic recovery is underway, which is one of the reasons that inflation is rising, but it is also creating better conditions for dividends. And this is particularly so for stocks that actually benefit from rising prices, or are, at the very least, unaffected by them. 

Hedging with oil stocks

My big picks for the year, as I have written about a few times in the past, are oil stocks. Rising fuel prices are one of the key reasons that prices are rising. And oil stocks are benefiting from the trends. They are likely to continue doing so in the near future as well. I have already bought them, and while so far they are not exactly the best performing dividend stocks around, I expect passive income from them to improve in 2022. That is of course if the pandemic does not return. And there are no guarantees it will not, considering the fast rate at which its variants develop. 

Utilities offer a solution

I also like stocks of utilities, some of whose dividends are inflation-linked. Inflation this year would, of course, be far in excess of the average inflation they take into consideration, but I still think that is better than nothing. Besides, some of their higher costs would also be passed on to consumers. Indeed, they already have been. 

Even though higher utility bills could be a big potential national problem in 2022, the companies themselves might still be insulated. It appears that the government could have to bear part of the burden like in other European countries, through tax cuts. To put it another way, I think rising electricity and gas costs might not have a significant impact on utilities’ earnings. I would buy some utility stocks now. 

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.

A lot of people like the idea of investing in shares, but they may take a while to put it into practice – if they ever do. Meanwhile, as years or even decades pass, they may be missing some great opportunities. I understand why many people hesitate before they start investing. Maybe they feel they don’t have enough money to begin, or lack the right knowledge.

If I wanted to start investing in shares today, even if I had very limited funds, here are three proactive steps I would take.

1. Setting my budget to start investing

I actually do not think it is a big deal to begin investing with only small funds. In fact I think it can be a good thing. In the beginning of any activity we often make mistakes. They can help us improve in future. Learning from investing only a small amount can help me keep my mistakes cheap.

I would not focus on the absolute size of the funds I could use to start investing. Instead, I think it is more important that I take time to decide what funds I could comfortably invest and stick to that. Setting a realistic budget and having the discipline to follow it each month is a critical foundation to a successful investing approach, in my view. The secret of many successful investors is simply the fact that they have the discipline to invest consistently in the market for the long term, through thick and thin. Over the course of time, even modest annual returns can begin to compound into something more substantial. That is why I think it is helpful to start investing sooner rather than later in life — whatever my budget.

2. Ask myself why

It may sound daft to talk of thinking about why I would invest. After all, for most people surely the point of investing in shares is to make money?

That may be true but I do not think it is the full picture. For example, if my objective is passive income, I may focus on high-yield shares like Imperial Brands or M&G. By contrast, if I am interested in long-term growth, I may invest in shares that do not pay dividends but have strong revenue growth, such as Tesla or Amazon. Each has its own attractions — and risks.

If the investment is intended to help me fund future expenses like school fees or care costs, I may want to take an approach to investing that prioritises risk management rather than simply chasing the biggest possible financial returns. Whatever my reasons to start investing, being clear about them will help me develop an investment approach that suits my personal circumstances.

3. Take time to read and learn

A great business does not necessarily make for a great share. So instead of diving straight into investing, first I would take some time to learn about shares and the stock market.

That may seem boring – but it will probably seem much more exciting once I realise it can hopefully improve my investment returns. Taking time to research shares that can match my personal investment objectives will hopefully mean that I can start investing successfully. The more I learn, the more likely I am to get better as I go.

Christopher Ruane owns shares in Imperial Brands. 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, Imperial Brands, 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.

These FTSE 100 shares offer brilliant value on paper. Are they great buys, or are they classic investor traps?

Big all-round value

On paper, J Sainsbury (LSE: SBRY) seems to offer top value. City analysts think annual earnings will near-enough double in this fiscal period (to March 2022). This leaves the supermarket trading on a forward price-to-earnings (PEG) ratio of 0.1. A reading below 1 suggests a share is undervalued. Sainsbury’s also boasts a chubby 4.2% dividend yield at current prices.

Fierce competition has been a huge problem for Sainsbury’s over the past half a decade or so. And it remains a huge danger as its competitors rapidly expand. Just this week, discount chain Aldi opened its first checkout-free site in London, a store designed to remove the problem of queues.

The increased popularity of low-cost chains is a growing problem for middle-of-the-road operators like Sainsbury’s. And especially right now as soaring inflation puts household budgets under the cosh.

City analysts think Sainsbury’s will enjoy profit increases over the next three years. No doubt the grocer’s massive investment in online shopping has helped these projections and boosted its growth prospects.

However, in my view, the rising competition it faces in the real world and in cyberspace — and the threat this poses to its revenues and ultra-thin margins — makes the FTSE 100 firm a risk too far for me.

A better FTSE 100 bargain

I’d much rather invest my hard-earned cash in BAE Systems  (LSE: BA). Competition isn’t as problematic for this FTSE 100 share because of its exceptionally long relationships with the UK and US armed forces.

It’s at the cutting edge of defence product design and this makes it a critical supplier to modern militaries. And the company has the scale and the pedigree (for example in submarine building) that pose formidable barriers to entry for almost all other defence companies.

War is a constant theme of human history. This means that demand for BAE Systems’ hardware is always pretty robust, providing the business with great earnings visibility. The outlook for arms spending is particularly strong at the moment too, given the febrile geopolitical atmosphere.

Tensions are high as the Russia-Ukraine situation remains fragile. Concerns over Chinese strategies are testing nerves in the West meanwhile, and fears over North Korea and terrorist threats continue to rumble on in the background.

My main concern with investing in BAE Systems is the ever-present danger of product failure. A high-profile disaster in the field could prove disastrous for future orders. Still, the business has a terrific track record on this front, This has allowed it to forge those solid relationships with London and Washington, while also helping it to win more business in emerging markets too.

Today, the FTSE 100 share trades on a forward price-to-earnings (P/E) ratio of 12 times. It carries a healthy 4.4% dividend yield as well. At current prices, I think BAE Systems could be too good for me to miss.

Royston Wild 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.

I turned positive on the BT (LSE: BT.A) share price for the first time in several years in the middle of 2020. At the time, I believed the company was working hard to put its past mistakes behind it, and these efforts, coupled with the group’s discounted valuation, could act as a dual tailwind for the stock.

As it turns out, I was right on the money. Since the middle of 2020, the stock has returned around 100%. This figure does not include dividend income, although the company did not pay any income to shareholders for its 2021 financial year. 

Outperformance

The way I see it, the BT share price has outperformed for two reasons. Firstly, the company’s operating performance has not been as bad as expected.

In fact, trading has been so strong the business announced towards the end of last year that it would no longer be seeking a joint venture partner to help fund the rollout of its fibre broadband network across the country.

What’s more, the company has also reintroduced its dividend. The City groaned when management announced the group would be eliminating the payout in 2020. Some analysts speculated it could be years before the organisation reinstated the distribution.

However, the corporation now plans to pay a dividend of 7.7p in its current financial year, giving a dividend yield of 4.1% on the current share price. 

The second reason why the company has outperformed, in my opinion, is down to its valuation. As I expected in 2020, it was only a matter of time before bargain-hunters started sniffing around. At its low point, the stock traded at a forward price-to-earnings (P/E) multiple of about 5. Today, the figure is approximately 9.7. 

The outlook for the BT share price

The question is, can this trend continue? I think it would be silly for me to suggest the BT share price can continue to rise indefinitely. The company faces multiple challenges.

Higher interest rates will increase the cost of financing for the enterprise. With a total debt mountain of £23bn, even a small interest rate increase could cost the corporation tens of millions of pounds in additional fees every year.

At the same time, the group is facing increasing pressure from competitors. 

These are some of the biggest challenges the enterprise will face going forward. Still, I think BT’s outlook has improved dramatically over the past couple of years. Earnings growth is expected to return in fiscal 2023. If the company hits this target, it will be the first time earnings to have expanded since 2016. 

This growth potential, coupled with the return of the business’s dividend, suggests to me the outlook for the company is improving. As such, I would be happy to buy the stock for my portfolio today.

I think the BT share price can go higher, and I want to capitalise on this growth.

Rupert Hargreaves 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.