What is common among the three stocks Evraz, Ferrexpo, and CMC Markets? They are some of the best dividend stocks today. The FTSE 100’s Evraz has been a dividend star for all of last year, with a whopping 16% dividend yield. The FTSE 250 stock Ferrexpo is an even better passive income stock for me today with a yield of 17.2%. Investing platform CMC Markets is not much far behind either, with a 10.5% yield. 

Dividend tax to pay

I hold all three stocks in my investment portfolio. I see them all as good companies, whose stock prices could rise over time, but right now nothing beats their dividends. The trouble with dividends, though, is that they attract taxes. My returns from them would look even sweeter if I could pay minimal taxes on them.

Right now, I have a dividend allowance of £2,000, which means that up to this amount I do not have to pay taxes on my dividends at all. But, if I invested say, £20,000 across all three of these stocks, my total dividend pay out from them at today’s yields would be around £2,900. This means I would still need to pay tax on the £900 earned over my dividend allowance. Moreover, the higher my tax bracket, the more I would have to pay. It could even be over 38% of my dividend income.

The Stocks and Shares ISA alternative

There is a solution to this challenge, however. And that is the Stocks and Shares ISA. In it, I have an allowance of £20,000 every year for investing, and all investments made in it are non-taxable. This means, the extra £900 would attract zero tax if I use this option. 

This for me, is a particularly good alternative during a year when dividends are rising. Right now, the average FTSE 100 dividend yield is 3.4%. However, economic recovery is underway, markets are strong, and hopefully we will be able to put the pandemic behind us in 2022 as well. This could be a positive for business, which has already recovered a fair bit in 2021. Research by AJ Bell even expects FTSE 100 yields to rise to 4.1% on average.

Even better passive income expected

It is possible ,of course, that the same stocks will not continue to yield such high passive incomes for me in 2022. In the case of miners like Evraz and Ferrexpo, for instance, some cooling-off in investor interest has been visible for months as metal price forecasts have been reduced for this year. But on the whole, dividends are likely to be much better anyway. The basic point I am making here is that I expect my dividend income to continue being strong this year. And knowing this, I would much rather save on taxes than not. The Stocks and Shares ISA provides me a good alternative to hold on to my earning for the next tax year. 

Manika Premsingh owns CMC Markets, Evraz and Ferrexpo. 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.

As if the previous inflation numbers were not bad enough, it gets worse. In December 2021, the UK’s inflation, based on the Consumer Price Index (CPI), rose to 5.4% on a year-on-year basis, up from 5.1% in November. So far, it has not had an impact on stock markets. The FTSE 100 index is actually inching towards 7,600 as I write this Wednesday morning, completely ignoring the inflation print. 

What’s the impact of high inflation?

This is fortunate, but I do believe that the uncomfortably high price rise could take a toll on companies’ financial health over time. It already has started to do so, which is also why inflation is rising. At least some companies are passing on increased costs to customers now. In fact, it has now risen enough to impact wages. Real wages in the UK have fallen for the first time in November 2021 since July 2020 as inflation rises. This essentially means that the average person is able to afford less now, which of course is bad news for both consumption and investments, and from there, the stock markets. 

But as an investor, there is very little I can do about high inflation. What I can do is make investments that will give me positive real returns despite rising prices and help tide me over this phase. There are many ways to do this. First, I’d consider stocks most likely to be impacted by rising inflation. 

Stocks I’d be careful about now

All companies that sell price-sensitive products could be affected, making me cautious. I am thinking of FTSE 100 grocers like Tesco and J Sainsbury. And also high-street retailers like JD Sports Fashion and Next. Even delivery service providers like Ocado could take a hit as the average consumer cuts back on expenses. Similarly, other stocks associated with e-commerce could be impacted as well. These include the likes of warehouser Segro, parcels’ provider Royal Mail, as well as packaging providers like Smurfit Kappa, Mondi, and DS Smith. 

I like many of these stocks for other reasons and hold some of them in my portfolio too. They have shown fast recovery recently, adaptability during the pandemic and their prospects look good too. But I would watch out for the impact inflation could have on them and act on my investments accordingly. 

Stocks to buy

However, like there are stocks that could face the brunt of inflation, there are those that could gain from it. The headline ones among these are oil stocks, which have seen a huge turnaround in fortunes as oil prices have risen over the past year. BP and Royal Dutch Shell are my favoured stocks to beat inflation. I am also optimistic about the prospects for banks like Lloyds Bank and Natwest, which could benefit from rising interest rates in the UK, since their margins could improve. 

However, no company is immune to the negative fallouts from inflation if it rises too much. Inflation could impact demand and economic growth, which in turn is likely to affect demand for both oil and for loans. With interest rates on the rise and a withdrawal of public spending though, inflation could well come under control soon. So I would stay optimistic for them. I have already bought the oil biggies and am planning to buy banks now. 

Manika Premsingh owns BP, JD Sports Fashion, Ocado Group, Royal Dutch Shell B, and Royal Mail. The Motley Fool UK has recommended DS Smith, Lloyds Banking Group, Ocado Group, 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.

Towards the tail-end of 2021, my biggest fear for travel-related companies like Rolls-Royce (LSE: RR) was the emergence of a new Covid-19 variant. Should we get an especially contagious one, I reckoned the stock could plunge again. And then Omicron showed up, but the Rolls-Royce share price has remained resilient.

Thankfully, the latest version of the virus appears to produce less severe symptoms. And it looks like its rapid sweep through the population could even bring the Covid end-game a bit closer. So what might 2022 have in store for Rolls-Royce, and is it time for me to buy as a recovery opportunity?

I do wonder if one of Benjamin Graham’s famous quotes might be especially apt this year. He said that in the short run, the market is like a voting machine. But in the long run, it’s like a weighing machine. Short-term movements are based more on popularity, while long-term movements depend on the underlying performance of a company.

I do believe we have seen a couple of years of investors following sentiment towards the Rolls-Royce share price. And I reckon a return to a fundamental re-weighing of the company this year would do a lot of good. It would certainly help me get a handle on the stock’s underlying valuation.

Rolls-Royce share price revaluation

I’m convinced it would be a mistake for any re-weighing to be based on Rolls-Royce’s past performance, though. That’s risky at any time, with the old adage that past performance is not a guide to future performance worth repeating. No, two things have fundamentally changed. One is the market. I think it will be a long time before air travel volumes get back to 2019 levels, if they ever do.

The other major change is to the Rolls-Royce balance sheet. The company raised the cash needed to keep its head above water during the crisis. But net debt soared to more than £3bn at the halfway stage in 2021, up from approximately £1.5bn at the end of 2020. Still, the company’s December update reported net cash inflow in the third quarter.

Making good progress

Disposals were progressing too, having reached a total of around £2bn. So the company already looks to be making potential inroads into that debt pile. But the final picture of the post-pandemic company, in terms of assets, liabilities and operational capacity is still far from certain.

If full-year results, due 24 February, show improving progress towards debt reduction, I think that would help. It’s probably still too early to read anything into passenger numbers, though.

Waiting for the figures

The biggest problem for me is that it’s hard to find any useful figures right now. With a full-year loss recorded in 2020, historic earnings and P/E are pretty meaningless (and even less reliable than in more normal times).

So is it realistic to hope the Rolls-Royce share price will skyrocket in 2022? I do think there’s a chance it could happen. But whether it will is way too risky a question for me to gamble on. I’ll keep watching.

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

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Inflation means my income will not stretch as far as it did before. With annual inflation having soared to a near 30-year high of 5.4% last month, I have been looking for passive income ideas I can use to help beat it.

Here are two I would consider using.

Dividend shares

I like dividend shares as passive income ideas because they allow me to earn money from the work of large, successful businesses.

But high inflation could reduce the value of dividends for me. If the dividend income I receive each year is outstripped by inflation, then the real value of my earnings will be falling. If I can find dividend shares paying out at a higher rate than inflation, I could still benefit from passive income next year, even after the impact of inflation on my spending power.

Imperial Brands

One such company is tobacco giant Imperial Brands (LSE: IMB). Its shares currently yield 8%, comfortably above the rate of inflation.

Tobacco is a highly profitable business. Imperial can use such profits to support a high dividend. Declining cigarette use in many markets could hurt revenues, although the company’s strategy is to use price increases to mitigate the impact on profit.

From a business perspective, I think inflation could help Imperial’s revenues. In an era of rapid price increases, it should be easier for the company to hike the cost of its products. That said, this will not necessarily translate into higher profits, though, if cost inputs like labour and materials also increase in price. Indeed in its final results in November, the company’s outlook warned of the “risk of inflationary pressures”. It hopes to combat them through its buying strategy, strong profit margins and pricing power.

Direct Line

Another company with a dividend yield higher than inflation is Direct Line (LSE: DLG). The insurer with the iconic red telephone logo currently yields 7.2%.

Insurance categories such as home and motor tend to have fairly predictable economics. Sometimes the cost of settling claims can vary – for example, Direct Line warned last year that rising second-hand vehicle costs could eat into profits. But over time, such costs can typically be absorbed through adjusting premiums. It is the stability and resilience of insurance that attracts me to it as an investor. In Direct Line’s case, I see the dividend as a handsome reward if I hold its shares.

Like Imperial, I reckon Direct Line can manage inflationary risks by passing on some cost increases to its customers.

My next move as inflation soars

I would consider adding Direct Line to my portfolio. I already own Imperial for its passive income appeal.

While inflation can reduce the real value of dividends to me, I am also concerned about the impact on capital I tie up in shares. If inflation is high, then a static share price would mean that my capital represents declining spending power. So while I am hunting for inflation-busting passive income ideas, I am also looking at the share price growth prospects of companies I buy for my portfolio. If a company has strong income potential but also a business outlook that can support possible share price growth, it may be more attractive to me as an investor in inflationary times.

Christopher Ruane owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.

Shares of Tesco (LSE:TSCO) have had a flat start to 2022 so far. But it’s worth noting that the stock has climbed nearly 20% over the past 12 months – not bad for a retail giant. So, what can I expect throughout the rest of the year? And should I be considering this business for my portfolio? Let’s explore.

The bull case behind Tesco shares

Regardless of what’s going on in the world, people still need to buy staple goods. And this actually gave the supermarket chain quite an advantage over most other retailers during 2020. As non-essential stores were forced to close their doors, Tesco could continue operating relatively undisrupted.

Consequently, revenue and income throughout the pandemic only appear to have been mildly impacted. And now that the world is slowly moving out of the pandemic, the remaining problems will likely resolve themselves. But one issue that could stick around for a while is supply chain disruptions.

Despite the challenges of importing goods due to the bottlenecks at UK ports, Tesco’s management appears to have found a solution. By ramping up its use of trains to deliver goods from Spain, the company has largely avoided the supply chain disruptions that currently plague the retail space. And since these issues could remain in place for quite some time, the advantage of having regular product shipments could result in increased footfall to Tesco stores as other shops don’t have what consumers are looking for.

Needless to say, this gives Tesco an upper hand over its competitors. And if the volume of sales increases, resulting in higher profits, the Tesco share price could equally benefit.

What could go wrong?

As impressive as its logistics infrastructure is, there are some valid concerns surrounding this business. Let’s start with product distribution. The company may have found a way to get goods into the UK. However, delivering them to the stores or customers doors has proven challenging. The shortage of HGV drivers and warehouse workers have forced Tesco to raise wages, increasing its labour costs and, in turn, putting further pressure on margins.

This pressure is only amplified by inflation. As the cost of goods increases, Tesco is forced to raise its prices as the profit margins on groceries are already exceptionally tight. But with the cost of living going up, consumers may turn to alternative value retailers like Aldi and Lidl to reduce their shopping bills.

As Tesco is a volume-selling business, any drop in sales could significantly impact the bottom line, pushing its shares in a downward trajectory.

To buy, or not to buy?

The threat of discount retailers is not new. And management has started doing something about it with its price-matching and Clubcard Benefits schemes. The latter is particularly interesting as it enables the business to gather valuable data on its customers to tailor special offers unique to individuals. This is quite a powerful marketing tool and could maintain sales volumes even in an inflationary environment.

With that in mind, I believe Tesco shares could be heading upwards in 2022. That’s why I’m considering adding some to my income portfolio.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended 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 passive income is a common financial goal for investors. And while there are multiple ways to go about it, saving regularly and investing in dividend shares is my preferred method. While it can take some time to build up, saving as little as £20 a week is enough to get started, in my experience.

Saving regularly for passive income investments

One of the biggest barriers to entry into the stock market is the initial need for capital. After all, I need money to make money. Yet by saving regularly, this barrier can easily be overcome given time. Putting as little as £20 a week aside is enough to build up a pile of just over £1,000 a year. And that’s more than enough to start generating a passive income through investments.

Saving £20 a week can be a challenge depending on an individual’s financial position. But it can be achieved by sacrificing a few of life’s comforts, like pints at the pub or trips to the coffee house.

Avoiding the costs of investing

Buying and selling shares is not a cost-free process. Brokers charge a fee on each transaction that can quickly eat into investment returns if not handled correctly. Even platforms that claim to have commission-free trading still have substantial hidden fees. And in some circumstances, they can cost more than paying a flat broker commission.

So how can I avoid this problem? The answer is quite simple — trade less often. By investing in bulk, rather than small sums, the total number of transactions is lower, and brokers, in turn, take less of my saved-up capital.

But transaction fees aren’t the only expense to tackle. There is a far more sinister force at work… it’s called Her Majesty’s Revenue & Customs. Passive income from dividends and capital gains from investments are taxable. Yet, savvy investors can sidestep this entire expense by investing using a tax-efficient vehicle, like a Stocks and Shares ISA.

The risks of generating a passive income with stocks

The idea of seeing money magically appear in my bank account from dividends is undoubtedly exciting. But nothing is risk-free. And investments can go South, even those in large, well-established businesses. The pandemic-triggered market crash in March 2020 is proof of that.

By diversifying my portfolio, this risk exposure can be reduced. And by investing in companies that have multiple competitive advantages, the level of free cash flow is more likely to increase over the long term. That’s a critical trait since dividends, the source of my passive income, are typically paid out of a company’s free cash flow.

Getting started

Two passive income stocks with massive dividends that I’ve recently explored are Rio Tinto and Persimmon. They both have to contend with intense competition and pressure on profit margins. But so far, they seem to be staying on top. So, if I were building a passive income portfolio from scratch, these two stocks would definitely be where I’d start.

Zaven Boyrazian 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.

Over the past couple of years, BT (LSE:BT-A) shares haven’t exactly been the best investment. But following a change of strategy, this historically underperforming stock appears to have turned over a new leaf. In the last 12 months, it’s up almost 40%. And so far, 2022 has continued this upward trajectory, with BT shares climbing a further 10%.

What’s behind this new-found momentum? And should I be considering this business for my portfolio?

The bull case for BT shares

The company has suffered from poor leadership, bad capital allocation decisions, and a weakening grip on its market share for a long time. At least, that’s what I’ve seen. But it seems management has finally started doing something about it because recent trading updates have been quite impressive.

With accelerated deployment of its fibre-to-the-premises (FTTP) infrastructure across the UK, BT looks to be on track to hit its 25 million homes target by 2026. Meanwhile, the firm’s rollout of 5G now covers 40% of Britain’s population, with 5.2 million customers taking advantage of the new mobile network.

Despite this progress, pre-tax profits in its latest half-year report were flat. This was primarily due to customers upgrading from legacy products rather than increasing their spending. However, this bottom line could soon expand as operational cost savings are introduced. In fact, management recently accelerated its £2bn annualised savings target from 2025 to 2024.

With that in mind, I’m not surprised to see BT shares make a U-turn. And if its leadership successfully hits its milestones throughout 2022, I believe the stock could continue to climb from here.

Taking a step back

As encouraging as the recent progress is, I still have some reservations about this business. More specifically, its balance sheet.

Over the years, BT has racked up a significant amount of debt to maintain its infrastructure, as dwindling profits could not keep up with capital expenditure requirements. While this may potentially no longer be the case in the future, having nearly £23bn of debt racks up quite a large interest bill.

Getting deeper into the numbers, between March 2020 and 2021, the company paid £714m in interest on its loans. At first glance, the £2.5bn of operating profits appear to cover this. However, when considering the £2.1bn of lease obligations, the spare capital suddenly dries up.

That suggests the company will remain dependent on external financing until the bottom line can expand. Needless to say, taking on more debt only increases the pressure. And with interest rates already on the rise, profit margins could be in for a tumble.

The bottom line

All things considered, I’m not tempted to add this stock to my portfolio. While I think it’s plausible for BT shares to continue rising throughout 2022, the weak balance sheet could cause bigger problems in the long run. Therefore, I believe there are far better opportunities to be found elsewhere.

Zaven Boyrazian 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.

Many investors like tech shares for their potential growth prospects. But one UK tech stock has seen its price crumble lately. Over the past year, the shares have fallen 44%, as of the price at the time of writing this article today. Yesterday they hit a new 12-month low.

Below I consider whether that offers a buying opportunity for my portfolio.

UK tech stock — or retailer?

The company in question is Ocado (LSE: OCDO). A lot of people may think of this as a retailer not a tech business.

But Ocado’s retail operation is only one part of its business model. The company has used its experience to build an online commerce model offering everything from customer interfaces to automated warehouses. It hopes to sell this service to other retailers. The company has already signed up large shop chains, including Morrisons and Kroger.

I think it is this tech element of the Ocado business model that excited investors in recent years. The loss-making company has a market capitalisation of £11bn. I do not think that is justified by the highly competitive, low-margin business in which its retail arm operates. Tesco has a market cap only twice as big at £22bn. But Tesco’s most recent quarterly retail revenue was £20.1bn, compared to just £0.5bn at Ocado.

Instead of focusing on its retail operation, I think investors have been seeing Ocado as a potential online commerce solution provider, like Shopify or the solutions-providing part of Amazon.

Capital-intensive growth strategy

Like Shopify, Ocado’s digital technology may be scalable. In theory that could lead to improving profitability once it reaches critical mass. But key parts of its business look less scalable to me. To serve a client like Kroger, for example, the company typically builds new fulfilment centres. That involves substantial capital expenditure. I do not see it as scalable in the way a digital footprint can be. Once a warehouse operates at capacity, that is it. To increase fulfilment, it needs to spend money on more warehousing space. That is far more complex than simply adding extra computing power in the cloud at a marginal cost.

Ocado’s capital expenditure concerns me as it reduces the likelihood of profits in coming years. In its last annual results, the company recorded £526m of capital expenditure. It forecast capex of £700m for the most recent full year, the results for which are due next month.

Will I buy?

Spending money to grow is common business practice. Indeed, a positive investment case for Ocado could suggest that this ongoing expenditure is creating a world-class digital commerce service. That could enable the company to charge a price premium. As capex falls once the infrastructure is in place, the price premium could lead to attractive profits.

But what concerns me about Ocado’s business model is that it is spending large sums year after year, while profitability remains elusive. Amazon is only six years older. But last year its business model enabled £15.7bn of net income, while Ocado again made a loss.

I think the crumbling Ocado share price reflects growing investor concern about the company’s continued capex needs and weak profit outlook. I expect that to continue and think the price could fall further. I will not be buying Ocado for my portfolio.

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, Ocado Group, Shopify, 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.