During the past couple of years, a lot of wealthy people have been splurging on expensive cars. In fact 2021 saw Lamborghini set a new sales record. British carmaker Aston Martin (LSE: AML) has also seen growing unit sales. Does that mean I should consider adding Aston Martin shares to my portfolio?

Sales grow but losses remain

Expensive cars have apparently sold well as rich people bored in lockdowns have been keenly anticipating their future need for speed. Aston Martin has been trying to grow its sales aggressively. Last year’s wholesale volumes grew 82% compared to the year before. The sell through from wholesalers to retail customers was also strong.

But revved up sales do not necessarily translate to profits when one looks under the bonnet. In the first nine months of 2021, the company reported an operating loss of £68m. On top of that, the company’s indebtedness means it faces additional extra costs, such as for interest payments. So over the nine-month period, Aston Martin’s loss before tax was £189m.

The company also warned this month that slower than planned shipments of its Valkyrie model means adjusted EBITDA for 2021 is now expected to be around £15m lower than previously hoped. It emphasised that this was a change in timing only, as the cars are still expected to be delivered in future.

Positive direction

While the losses remain large, I do feel Aston Martin is making strong progress.

The sales performance is very impressive. Tight cost controls and business discipline could help the company return to profit in future, despite its current losses. The company’s cash flows also show signs of improving. In the third quarter, it reported free cash inflow of £5m. For the nine months, free cash flow remained negative as £39m left the business. But that was a vast improvement on the same period the prior year when the company saw more than half a billion pounds in free cash outflow.

However, improving prospects for a business do not necessarily make a company’s shares attractive to me. For example, if it has substantial debt, much of the benefit of any business improvement gets soaked up paying debtholders. So even in a business with an attractive profit at the operating level there may be limited or no funds to reward shareholders, for example with dividends.

My take on Aston Martin shares

Over the past year the Aston Martin share price has lost 23%, at the time of writing this article earlier today. The shares have lost a staggering 88% of their value since the company’s flotation in 2018.

To boost liquidity, the company has previously had highly dilutive rights issues. There is a risk that could happen again. Net debt stood at £809m at the end of September. While that is an improvement compared to the year before, it is still a significant debt. Much of it is at a high interest rate. There is a risk that losses could again stretch the company’s liquidity in future.

So while I think positive news on the company’s sales progress and profitability could help support a higher Aston Martin share price, I remain wary of the risks. I have no plans to add the shares to my portfolio.

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.

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Legendary investor Warren Buffett has accumulated decades of wisdom from investing in stock markets. That is helpful to him but also to many less experienced investors, as Buffett shares a lot of his thinking publicly.

Here are five ways I will be following Buffett’s approach when it comes to my own portfolio this year.

1. Stick to what I know

Buffett is emphatic that as an investor he tries to stick to industries that he understands well. That means he misses a lot of good opportunities. But he is alright with that, as he reckons that if he does not understand an industry, he is unable to assess whether a given company has any competitive advantage that could help it sustain future profits.

2. Focus on competitive advantage

Warren Buffett’s term for such an advantage is a “moat”. Like a medieval castle, he reckons a business moat can help protect what sits inside it from outside attack. That can help support profits in the long run.

I find that helpful as it can be easy to mistake a company that is well-managed for one with a strong competitive advantage. Over time, a company’s management changes. But the enduring nature of a structural advantage like proprietary technology or an iconic brand can help a company make profits for decades. Buffett’s investment in Coca-Cola is an illustration of that.

3. Investment not trading

Buffett likes to buy shares and hold them for decades. That does not mean he never sells. Sometimes his view on a holding changes and he cashes in his position. But if a company has the financial appeal he thinks it does, he is happy to keep holding it and benefitting from its future cash flows.

Instead of jumping in and out of shares based on small share price movements, Buffett tries to identify great companies in which he can invest for the long term. I think that sort of long-term viewpoint can also help me sharpen my investment focus.

4. Warren Buffett on diversification

Some of those companies Buffett has sold looked good to him when he bought them but stumbled unexpectedly. For example, he sold his position in Tesco at a loss in 2014 after an accounting scandal was revealed (which has long since been resolved).

That demonstrates the benefit of never putting all of one’s eggs in one basket, no matter how compelling the investment case may be. Buffett’s approach to diversifying his holdings across multiple companies and business sectors helps to reduce his risk if one of them performs badly. That is a valuable lesson I think can be usefully applied to my own portfolio no matter how small it is.

5. The value of patience

Warren Buffett does not make trades just because he has money to invest. He is willing to sit on tens of billions of pounds, for years at a time if necessary, rather than invest it in shares that do not meet his criteria. That takes patience and willpower, but over a span of many years it can lead to dramatically better returns. It allows Buffett to make the most of sudden market downturns in a way he could not if he had already invested all his funds.

Christopher Ruane 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.

Even when working hard for a wage, passive income can come in handy. Money that one receives without having to labour for it can be used to help with everyday expenses, or fund occasional splurges.

One of my favourite passive income ideas is investing in dividend shares. Here is how I would do that to target average monthly incomings of £300.

What are dividend shares?

Some companies that make profits use them to pay dividends to shareholders. So if I buy even just a single share in a company and it pays dividends, I will receive them based on the size of my holding. Something I particularly like about dividend shares is that if the company keeps paying dividends, I will receive them for as long as I hold the shares. So money I invest today could still be generating effortless earnings for me 10, 20, or even 30 years from today.

Dividends are never guaranteed and even successful companies sometimes cut or cancel a dividend they have paid for many years. To reduce that risk in my plan, I would diversify among different companies and business areas.

Doing the maths

Figuring out how much passive income I would receive depends on what is known as the dividend ‘yield‘. That is basically the percentage of today’s purchase price I would expect to receive as income per year at the current dividend rate.

For example, the yield on BP is 3.9% at the current share price. So if I invested £1,000 today I would hope to receive £39 of dividend income in a year. The Vodafone yield of 6.2% means £1,000 invested in the telecom giant’s shares would hopefully earn me £62 of dividend income in the following year. Over time, if dividends increased I may earn a higher yield based on my purchase price today. The opposite could happen, though, if a company cuts its dividend. Both BP and Vodafone have done that in the past few years and could do it again in future, for example, if their profits decline.

£300 a month of income is £3,600 in a year. So if I bought shares that yielded around 6% (similar to the Vodafone yield), I would need to invest £60,000. For shares that yielded roughly 4% (like BP) I would need to invest £90,000. In each case, I would be targeting an average yield from a diversified portfolio of shares.

How I would start building my passive income

£60,000 is a lot of money to invest. But I could hopefully hit my target if I invested that amount in shares yielding around 6%. A number of FTSE 100 shares yield 6% or higher, including Rio Tinto, M&G, Direct Line, Imperial Brands, British American Tobacco, and Vodafone. But not all may fit my risk tolerance. Although income is my objective here I would also consider the prospects for long-term share price gain or falls. There is little appeal for me in earning passive income from a company if its falling share price ends up costing me more than the dividends I received. 

So I would do research into the right portfolio of dividend shares to meet my passive income objectives and risk tolerance. Then, I would begin investing through a Stocks and Shares ISA. I do not need £60,000 to start – I could actually begin with much less, if I was willing to accept a smaller monthly income than £300.

Christopher Ruane owns shares in British American Tobacco and Imperial Brands. The Motley Fool UK has recommended British American Tobacco, Imperial Brands, 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.

Key points

• More investors are moving from ‘dirty’ fuels to renewable energy
• Stocks in this sector are rapidly expanding their portfolios
• Wind and solar energy can provide diversity

Renewable energy stocks are going to play a big role in the global production of energy for decades to come. Many investors are now turning away from ‘dirty’ fuels, like oil and gas. I want to know how I can gain exposure to cleaner forms of energy. These include wind and solar power. There appear to be some excellent stocks available on the market. Let’s take a closer look at two of these companies.

Turbines to power the future

The first stock is Greencoat UK Wind (LSE: UKW), listed on the FTSE 250. As an investment vehicle, it provides investors with exposure to about 40 wind farms. These wind farms are scattered across the UK.

Yearly profits before tax have increased to £105m in the 2020 calendar year, from £59.95m in 2016. This growth is partially reflected in the share price. Since January 2016, the price of shares in the company has increased nearly 20%. This is not heart-stopping by any means, but it is consistent.

On the other hand, the earnings-per-share (EPS) data tells a different story. Over the calendar years 2016 to 2020, EPS is down 38%. This is in part due to the issue of shares over the period. Greencoat UK Wind has undertaken share issues to fund the purchase of stakes in new wind farms and to pay down revolving credit facilities. In November 2021, for instance, the company raised £450m. Demand for these new shares massively outweighed supply, showing that renewable energy is a popular segment of the market.

The latest share price is currently trading 9.7% above the value of the company’s holdings, called the net asset value (NAV). This means that the share price is slightly expensive and I would therefore pay a premium when buying shares in this company.

Renewables Infrastructure Group

The other company I’m interested in is Renewables Infrastructure Group (LSE: TRIG). Also listed on the FTSE 250, this company is a similar investment vehicle to Greencoat UK Wind. With holdings in over 70 wind, solar, and battery storage facilities, Renewables Infrastructure Group has a strong presence across Western Europe and Scandinavia.

Like many other companies in the renewables sector, it has been fundraising through the issue of shares. The most recent share issue, in September 2021, amounted to £200m and was massively oversubscribed. In the same month, the company acquired four solar sites near Cadiz, Spain. The acquisition will further diversify this stock’s investments.

Similar to Greencoat UK Wind, however, EPS data does not make happy reading for investors. For the calendar years 2016 to 2020, EPS is down 32.4%. This can again be partially explained by the numerous share issues over the years and therefore may not be as bad in reality as it appears on paper. Indeed, the share price is trading at a 16% premium to the NAV.

These two stocks are gearing up for the future. While the EPS data and premiums may be off-putting, I believe that there is such exciting growth potential for these renewables companies and the broader sector. I will be buying both of these stocks now for a diverse renewables portfolio.       

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. 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 like buying and holding stocks in my portfolio for a long time. It takes away the need to follow closely what is going on with an individual company on a regular basis. It also offers me the opportunity to benefit from a company’s long-term performance. One UK share I already hold in my portfolio is yielding just over 8% right now. I would still consider buying more today and holding for a decade.

8% yielding UK share

The company in question is tobacco giant Imperial Brands (LSE: IMB).

Tobacco is an industry with highly cash generative properties. Smokers regularly buy cigarettes. Even price increases often only dent demand rather than hurting it badly. That gives tobacco companies pricing power. Such pricing power can help to offset falling sales as the number of smokers in many markets falls.

But cigarettes are cheap to make, so tobacco companies often throw off large free cash flows. That can enable them to fund meaty dividends. Imperial, for example, currently yields 8.1%. British rival British American Tobacco offers 6.9% and US giant Altria is yielding 7.1%.

Imperial is the highest yielding of these three. That is attractive to me. But why is Imperial the highest yielding of the trio?

Future prospects

I think Imperial’s higher yield reflects several investor concerns.

First, the company did cut its dividend sharply a couple of years ago. Last year its dividend growth was only 1%. So the prospects for dividend growth look fairly limited. I do not like dividend cuts but I think this painful medicine did make the dividend more sustainable for the company. Even with limited growth prospects, an 8% yield attracts me.

Another concern is the company’s focus on maximising market share in key cigarette markets rather than doubling down on next generation products such as vaping. This could go either way, I reckon. I think milking the cash cow of cigarettes for as long as Imperial can is good business sense. There is a risk that reducing its next gen plans could lead to revenue gaps in future. On the other hand, it means competitors like British American Tobacco can invest heavily in developing the market, much of which remains unprofitable. Once the economics are more attractive, Imperial could decide to increase its footprint in non-cigarette alternatives. Meanwhile, limiting its spend on building the next gen market frees up money that can be paid as dividends.

Why I would build and hold

Over the next decade I expect cigarette smoking rates to decline in most or all developed markets. That could hurt revenues.

But cigarette use has been in long-term decline for decades. Through its pricing power, a premium brand owner like Imperial is able to offset at least some of the profit impact. I expect Imperial to remain profitable for years and perhaps decades to come. I am concerned that falling profits could lead to more dividend cuts down the line. But a dividend in excess of 8% means there is some cushion for me as an investor even if there are more reductions in the payout. For now I would be happy to keep buying Imperial, tuck it in my ISA, and sit back as the passive income hopefully piles up for the coming 10 years.

Christopher Ruane owns shares in British American Tobacco and Imperial Brands. The Motley Fool UK has recommended British American Tobacco and 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.

As I look at 2022, I think that banking could be a hot sector to invest in. Several central banks have either started to raise interest rates or are going to start doing so shortly. Leading research analysts are calling for as many as four rate hikes from the US this year, and even three from the UK! Given the benefit of higher interest rates for the operating income of banks, I’m on the hunt for good FTSE 100 banking stocks. 

A bank focused on growing regions

Last week, one of the best performing FTSE 100 stocks across the board was Standard Chartered (LSE:STAN). The share price jumped almost 10%. Over a one-year period, the share price is up 7.6%. 

Standard Chartered is a global bank, employing over 85,000 people in 59 markets. It operates in different segments, including corporate, retail and private banking. 

One of the strengths that I see in particular with this FTSE 100 stock is its deep ties with Asia. It’s dual-listed in both the UK and Hong Kong. The presence it has in areas such as Hong Kong and Singapore is key, as well as having an office in mainland China. In coming years, this part of the world is expected to develop fast, helping to create wealth in the process. As a bank with a focus on this region, Standard Chartered should be able to benefit from new accounts and attracting more deposits.

Benefiting from higher interest rates

Aside from the specific benefits of Standard Chartered, it should be aided by higher interest rates around the world. I think this is one reason why other FTSE 100 banking stocks also rallied last week. 

Higher interest rates allow banks to make a larger net interest margin. This margin is the difference between the rate charged on loans versus the rate it pays out on deposits. The higher the base interest rate, the higher the margin that the bank can make. So one reason why the share price has been rallying is due to expectations that more rate hikes are coming in 2022. 

If this is the case, then over the course of this year and beyond, Standard Chartered should record more operating income. This then helps to filter down to the bottom line. If the bank can keep control of costs, then profitability should increase.

A FTSE 100 banking stock for the future

In terms of risks, the business does need to keep a firm grip on internal controls and reporting. It was recently fined over £46m by the UK regulators. This was for misstating liquidity positions over a period from 2018 to 2019. Although these issues are in the past, a company the size of Standard Chartered does have the reputational risk of not accurately reporting the finances when due.

I’m happy to accept that risk, given the opportunity for the firm to perform well in the future. This comes both from the focus on Asia and higher potential interest rates. I’m considering buying the stock at the moment.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Standard Chartered. 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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Key points

• After news broke of GlaxoSmithKline rejecting the £50bn bid for its consumer healthcare unit from Unilever, the former’s share price rose, and the latter’s fell
• The Glaxo board stated the bid fundamentally undervalued the business, but based on an enterprise value-to-sales ratio, the offer was at a healthy premium
• The market seems to be pricing in a higher bid being accepted, which it views as good for Glaxo but not for Unilever

On Saturday, news broke that GlaxoSmithKline (LSE:GSK) declined a £50bn bid from Unilever (LSE: ULVR) for its consumer healthcare business. According to the Financial Times, the offer came in on December 20 and comprised £41.7bn in cash and £8.3bn in Unilever shares. On Monday, the market had its say: the Glaxo share price rose 4.07%. The Unilever share price, however, slid by 6.97%. What could be behind the radically different moves in the two companies share prices?

GlaxoSmithKline split

Glaxo’s board has stated that the £50bn offer “fundamentally undervalued” the consumer healthcare business, which is a joint venture with Pfizer. Glaxo plans to spin off the consumer healthcare unit in 2022. That move will create a ‘new-Glaxo’ focused on biopharma, with current shareholders getting a stake in both. Management insists it intends to go ahead with the split. Yet I’m left wondering if the offer is considered sound in principle but needs some movement on the price. After all, the board didn’t state they had no intention to sell. Also, The FT quoted a source close to Pfizer saying an offer nearer £60bn would make the board consider selling.

Judging by the share price reactions, the market seems to believe that other offers are on the way and might be accepted. However, the market also seems to think that a new, higher bid would be favourable for Glaxo but not for Unilever.

Would Unilever be overpaying?

The Glaxo board believes the consumer healthcare business is worth more than £50bn. But at that price, the unit would be priced at five times enterprise value (EV) to sales, given that it reported a little over £10bn in revenue in 2020. At £60bn, the EV-to-sales ratio would be six while Unilever as a whole trades at 2.87 EV-to-sales. Reckitt Benckiser trades at an EV-to-sales ratio of 3.9.

Now, of course, there are differences in growth rates and profitability. There are arguments for synergies and cost reductions too. But on these metrics, it’s hard to say that Glaxo’s consumer healthcare business is fundamentally undervalued. Consider that Glaxo as a whole has an enterprise value of about £111bn. The offer values the consumer healthcare business as roughly 45% of the firm’s value, despite delivering only 30% of its revenues.

Final thoughts

I feel the market is pricing in a higher bid being accepted. But I also believe it views the move as being bad for Unilever, which it sees as overpaying. There could also be concerns around stewardship and integration. The market does appear to see a sale as being good for Glaxo — and Pfizer — as a healthy premium would be paid. 

James J. McCombie owns shares in GlaxoSmithKline and Unilever. The Motley Fool UK has recommended GlaxoSmithKline 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.

My hunt for enduring dividend investments keeps me away from some shares with big yields. And that’s because one of my main selection criteria is a record of consistent trading and financial outcomes.

The quality of UK dividend stocks varies

And steady numbers aren’t always present in the records of big-yielding stocks. For example, many firms in cyclical sectors can produce erratic revenues, cash flow and earnings over time. And that can lead to inconsistent dividend payments to shareholders. Sometimes, company directors stop dividends altogether if a business is trading through a difficult patch.

Of course, there’s no guarantee dividend payments will continue even when I find a company with a record of steady trading and finances. But I’d rather invest in a dividend-paying company that has got a decent and consistent record than in one that hasn’t. It’s just one of several steps I can take to try to mitigate some of the risks involved with stock investing.

Last week, I bought shares in IG Group (LSE: IGG), the platform provider for traders and investors. The initial attraction for me is the 5.4% dividend yield. With the share price near 805p, City analysts predict that level of shareholder payment for the current trading year to May 2022. However, a year further ahead, analysts expect the payment to rise by around 10%.

I think the company’s business model is interesting — skimming a profit from the activities of traders and investors strikes me as a steady activity. And I reckon there’s evidence of the soundness of that theory in IG’s trading and financial record.

For example, since 2016, the dividend payment has been running at a compound annual growth rate near 6.6%. And backing that up, revenue has been growing at an annualised 12%, normalised earnings per share at almost 18% and operating cash flow at just over 21%.

A steady activity

However, despite that consistent financial record, the share price is only around 4% higher than it was five years ago. And there have been some stomach-churning lurches lower along the way. But, so far, the stock has recovered each time. For example, it’s up by about 18% over the past year.

My guess is stock market investors usually assume IG’s profits will be hit by the economic crisis of the day. But in reality, trading activity tends to increase during times of market volatility. And that can fuel IG’s profits. 

One good example of the effect in action is the recent coronavirus situation — traders and speculators hit the markets in their droves when many were furloughed with time on their hands.

In summary, the dividend has been consistent but the stock price has been erratic. However, I still think this is one of the best UK dividend stocks for me today. And one factor that bolsters my confidence is the firm’s strong balance sheet — there’s a sizeable net cash position in the accounts rather than net debt.

All shares carry risks, but I’m planning on sticking with this one for the long haul.

Kevin Godbold owns shares on IG Group Holdings. 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.