It isn’t always easy to know how to start investing. When I began, I faced two big challenges. First, it felt like there were too many shares and funds to choose from. Second, I didn’t have enough cash to build a balanced portfolio.

With the benefit of hindsight, I’d do things a little differently. Here, I want to explain how I’d invest £3,000 today if I was starting from scratch.

Before I start, a quick health warning. Investing in the stock market can be a great way to build wealth, but the future value of shares is always uncertain. Share prices can fall and there’s no protection if things go wrong.

For this reason, I’d always make sure I had at least three-six months’ income saved in cash before I put money into the stock market.

How I’d start investing in stocks

Three thousand pounds is not a huge amount in stock market terms, but I think it is enough to build a decent starter portfolio.

What I’d do is invest £2,000 in an investment trust. This would give me exposure to a ready-made portfolio, run by professional management.

The one I’d choose is City of London Investment Trust (LSE: CTY). This trust invests in good quality large companies, with a bias towards dividend stocks. City of London’s largest holdings including drinks giant Diageo, British American Tobacco, Tesco and insurer Phoenix Group.

However, this trust is not just a FTSE 100 clone. Its portfolio also includes FTSE 250 dividend stocks and overseas firms such as Microsoft, and Swiss-based Nestle.

City of London shares currently offer a dividend yield of 4.8%. This is usefully higher than the FTSE 100 yield of around 4%. I also consider the trust’s payout to be exceptionally safe — it has increased its dividend for 54 consecutive years. That’s one of the longest records in the UK market.

What to watch

I feel confident I could put my money into City of London Investment Trust and probably never need to sell. But one risk that concerns me is that the trust’s focus on income could mean its share price growth underperforms the wider market during periods of strong growth.

Another possibility is that the trust will alter its strategy or increase its fees — both could leave shareholder returns lagging a cheaper index tracker fund.

However, these risks would not stop me buying City of London Investment Trust. On balance, I think it would be an ideal way for me to create a starter portfolio with limited cash.

Here’s how I’d invest the final £1k

I’ll admit City of London Investment Trust is quite boring. It’s never likely to make headlines or deliver the kind of rapid gains possible with a successful growth stock. 

Personally, I’ve got no problem with this. Where my money is concerned, I don’t want too much excitement. But as an active investor, I do want to have a chance of beating the market and finding big winners.

For this reason, I’d use the final £1,000 of my £3,000 budget to invest in small-cap growth stocks. The smallest amount I’ll invest in a single stock is £500, to limit the impact of trading costs. With £1k, I’d be able to add a couple  stocks to my portfolio.

So here I’m going to look at two small-cap stocks I’m interested today.

#Small-cap 1: a genuine bargain?

My first pick is currency exchange specialist Argentex (LSE: AGFX). This £100m company specialises in providing forex services to companies and wealthy individuals. After a difficult period in 2020, this business appears to have returned to growth.

Revenue rose by 33% to £15.7m during the six months to 30 September, while pre-tax profit was up 22%, at £3.3m. Profit margins are high, at around 27%. Argentex also converts most of its income to cash, supporting a useful forecast dividend yield of 2.6%.

Founder and chief executive Harry Adams owns 12.3% of Argentex stock. Therefore, I reckon his interests should be well-aligned with those of shareholders.

The main risk I can see is this sector is increasingly competitive. There are a number of smaller companies who are cutting the cost of foreign exchange and fighting to take market share from the big banks.

There’s no guarantee that Argentex will be a long-term winner. But the stock looks cheap to me on 11 times 2022 forecast earnings. If it can hit earnings growth forecasts of 34% for the current year, I think the shares could rise sharply. This is a stock I’d like to add to my portfolio.

#Small-cap 2: a UK consumer favourite

Sofa and carpet retailer ScS Group (LSE: SCS) benefited from a surge of pent-up demand last year and delivered very strong sales.

The company says that new orders have now returned to pre-pandemic levels after last year’s post-lockdown surge. But ScS’s order book of £132m at 20 November is still nearly double the level seen before the pandemic. This suggests to me that profits should be strong this year as the order book is gradually delivered.

One attraction for investors here is that ScS does not have to pay upfront for its stock. Instead, it collects a customer deposit and then orders from its suppliers. Customers must pay for their products before delivery, but ScS does not normally pay its suppliers until the end of the month following delivery.

As a result of this model, the retailer generates a lot of cash. At the end of the last financial year (July 2021), the group reported net cash of about £50m, excluding customer deposits.

The main risk I can see is that when ScS next reports, we’ll find an order slowdown since last year has continued. With travel likely to reopen this summer, people may choose to spend on holidays instead. Rising inflation could also be a problem, as it may put household finances under pressure.

As I write, its shares are trading on just eight times forecast earnings, with a forecast dividend yield of 5.9%. I think the shares are probably cheap at this level, especially given the company’s net cash position. So ScS is a stock I’d consider buying today.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco, Diageo, Microsoft, 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.

I’m searching for the best buys for my Stocks and Shares ISA in 2022. Here are three great UK shares I’d purchase today to hold for years.

Latin fever

Demand for banking services in Latin America is tipped to boom. It’s why I’m considering snapping up Banco Santander shares for my portfolio. The financial giant has massive exposure to regional economic hotspots including Brazil, Argentina and Mexico where there are still many millions of unbanked citizens. This provides exceptional revenue opportunities as personal income levels rise quicker than in the West.

A word of warning however. Santander’s heavy exposure to Latin America could suffer from rocketing inflation in the US should it lead to extreme rate hiking by the Federal Reserve. The IMF just warned that “emerging economies should prepare for potential bouts of economic turbulence” in this scenario. This could lead to severe depreciation of local currencies in Latin America and large capital outflows.

Another top ISA buy

I think snapping up housebuilding shares such as Vistry Group (LSE: VTY) is a good idea amid ongoing inaction to solve Britain’s homes shortage. A report just produced by a House of Lords Committee says that a mix of uncertainty and delays to planning reforms is having a “chilling effect” on construction rates in the UK. As a consequence, it warns that government plans to build 300,000 new homes a year is under threat.

In this climate, it seems prices of Vistry’s properties will continue their rip-roaring ascent. At the same time, it’s likely that extreme competition in the mortgage market and lower-than-usual interest rates will remain in place to keep driving demand.

Housebuyer activity could jump if the Bank of England loosens affordability rules following an upcoming review too. And, of course, the government’s Help to Buy equity loan support scheme for first-time buyers is still running.

Vistry Group said it continued to witness “strong demand” for its homes in November’s most recent trading update. I’d buy it for my Stocks and Shares ISA even though sharply-rising building costs pose a threat to profits.

A FTSE 100 share to buy!

From a long-term perspective, I still think Santander’s global clout and strong market brand will make it a winner. I think the same could be said for FTSE 100 firm JD Sports Fashion too. I’m encouraged by the sportswear retailer’s (so-far) successful decision to expand its tentacles beyond Europe and into Asia and US in recent years. I also like the big investment it’s making to harness the e-commerce boom. JD posted record first-half results back in September.

I think JD Sports is a great way to ride soaring demand for athleisure products. However, I am aware sales could suffer badly if consumer confidence takes a tumble. A YouGov poll shows that two-thirds of Britons are worried about rising prices right now.

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.

The Ashtead (LSE: AHT) share price rose by an impressive 73% in 2021. This made it the best-performing FTSE 100 stock that year. The rally in the share price continued almost without pause, and finished not far off an all-time high by the end of December. I’m going to dig into the detail here to see why the company outperformed in 2021.

Share price momentum

Ashtead’s share price carried through strong momentum from 2020. In that year alone the stock had rallied over 42%. Finishing strongly, the company released its half-year results (the six months to 31 October) in December 2020. Indeed, Ashtead said its strong market outperformance during the pandemic had resulted in record free cash flow generation. As a result, the full-year figures to 30 April 2021 were also expected to be ahead of the company’s previous expectations. This pushed the share price up to near an all-time high.

By March 2021, the share price was already up by an impressive 15%. In another strong update, the third-quarter results released that month were again ahead of expectations.

Continuing outperformance

There was no end to strong trading for Ashtead throughout the whole of 2021. On release of the full-year results in June, its free cash flow generation was confirmed to be at a record £1,382m. This was considerably higher than the £792m achieved in 2020.

I think there were two main reasons for its business strength last year.

Firstly, Ashtead is an international equipment rental company. Its primary region is the US where it’s the second largest operator, working across 46 states from its 910 stores. Therefore, the construction industry is a key market for the company. This can be a rather cyclical sector.

However, the construction industry was given a major boost in 2021. Indeed, Congress passed President Biden’s Infrastructure Law last year. This aims to “rebuild America’s roads, bridges and rails,” and more generally invest in communities that have been left behind. Early numbers suggest it will also add up to 1.5m jobs per year for the next 10 years. At the very least, this should provide greater clarity for the construction industry in the US going forward, which is Ashtead’s key region.

I also regard the firm’s decisions over the pandemic as a reason for its outperformance. For example, the company prioritised protecting jobs and avoiding furlough during lockdowns. This meant it was always available for its customers. In doing so, it was able to gain meaningful market share, which it said was “a material ingredient in our success over the year”. This industry-leading performance led to record free cash flow generation.

A strong end to the year

Another positive update was given in its Q1 results for fiscal 2022 in September. Revenue grew 21% across the quarter. At this early stage, the board was confident enough to upgrade its expectations for the full year.

Momentum then continued into December on news that revenue for the first half grew 18%. Furthermore, earnings per share rose by an even bigger 38%, and the dividend was increased by 28%. The company said it was a record first-half performance with “clear momentum across the business”.

A number of upgrades across 2021, from positive sector catalysts, to industry-leading performance, helped to propel the Ashtead share price to all-time highs. The company should provide a further update in early March.

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

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The attraction of passive income is simple. Getting money without having to work for it can free up time for other more pleasurable activities. One of my favourite passive income ideas is investing in dividend shares. Here is how I would do that to target £200 per month in effortless earnings.

Dividend shares as passive income ideas

I like dividend shares because they can pay me for holding them without needing me to lift a finger. Large companies such as Unilever and Tesco have tens of thousands of staff. Along with professional management and business expertise, that allows them to generate profits. Such companies typically distribute some of those profits as dividends. So I can benefit from the success of blue chip companies simply by investing money in them.

There are a couple of things it is important to understand about dividends, though. First, they are not guaranteed. Secondly, past performance is not necessarily a guide to what will happen in future. For example, in 2020 Shell cut its dividend, for the first time since the 1940s. That is why I would diversify my investments across different companies and business sectors. That way, even if a company suddenly cancelled its dividend, I would hopefully still get income from other holdings in my portfolio.

Targeting a monthly income

Companies pay dividends on different schedules. Some pay annually, some twice a year, and others more often. The dates of payments are up to the company. So if I wanted a smooth £200 a month, I would need to consider dividend payment dates when selecting shares for my portfolio. Realistically I would save myself time by aiming for an average of £200 per month, but accepting that the money might not arrive in smooth monthly amounts.

£200 a month is £2,400 a year. To target that income, the amount I needed to invest would depend on the ‘yield’ of the shares I bought. Yield is the percentage of a share’s price that its dividend represents. So, for example, if I paid £100 for shares and got £10 a year in dividends, the yield would be 10%.

The role of yield

There are some dividend shares that yield 10% or above. But most dividend shares pay much less than that. Indeed, when I see a share with a double-digit yield, I look out for specific risks with the share that may have pushed the yield up that high.

I do think it is realistic to target an average 5% yield. A number of FTSE 100 companies currently yield 5% or more. At that level, to try and get £200 of passive income per month, I would need to invest £48,000. One of the things I like about shares as passive income ideas is that I can add to my holdings over time. So even if I did not have £48,000 to invest today, I could start with a smaller amount. Over time I could gradually add funds to aim for my target amount.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco 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.

2022 is expected to be a good year for FTSE 100 dividends. According to recent research by AJ Bell, the dividend yield of all index constituents put together will be 4.1%. This is an appreciable rise from the current 3.4% level. In other words, as an investor I can look forward to an increase in dividends accruing to my portfolio.

Why the Stocks and Shares ISA

However, I do have to keep taxes in mind, since dividends over £2,000 are taxable for the year ending 5 April 2022. I think there is a possibility that this allowance could be lowered in the spring budget, due in March this year. The government has taken on big debts to deal with the pandemic. And considering that last year was a good one for dividends, lowering the dividend allowance might just allow it to collect more taxes to fund its debt. I do have a way out of these taxes, though. If I invest through a Stocks and Shares ISA wrapper, which has an annual investment limit of £20,000, I do not have to pay these taxes.

FTSE 100 oil stocks are promising

The question now is, which stocks would I buy in the wrapper? There are plenty of stocks that I like for the upcoming financial year, but the FTSE 100 stocks that I think hold most dividend potential are oil companies. Big oil firms like BP and Royal Dutch Shell have come a long way since the pandemic happened. Oil prices have been on the rise in the past year and oil demand is likely to stay strong as the economy continues to gain speed. Both stocks already have above average dividend yields. BP’s is 4.3%, that Shell’s is 3.5%. 

And I think these are quite likely to rise more as the pandemic recedes further. Keeping this in mind, I think they would make good investments for my Stocks and Shares ISA. Though, I am aware of the fact that the pandemic might just throw another curveball our way. And that would mean a potential decline in dividends rather than gains. But this is a risk that I am happy to take right now, because in my assessment, the most probable outcome would be the end of the pandemic. 

Dividend yields could rise for banks

This risk, and this assessment, is also true for FTSE 100 bank stocks. This is the other sector that I think has a lot of promise with respect to dividends in 2022. Stocks like Lloyds Bank and HSBC had strong dividend yields pre-pandemic. However, they are yet to return to these levels even though they have resumed paying dividends. Both Lloyds and HSBC’s yields are actually below the average FTSE 100 yield. However, I think there is a strong chance of these improving as the demand for loans increases as the economy recovers. Also, with interest rates on the rise, banks have an opportunity to better their margins. Both stocks are on my investing wish-list for 2022. 

Manika Premsingh owns BP and Royal Dutch Shell B. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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It was a really good 2021 for FTSE 100 dividends. And it appears like this is going to be another great year too! Not only are total dividend payouts expected to be higher, a number of stocks will continue to offer pretty good dividend yields. Of these, at least three stocks are likely to yield 10%+ yields as per recent research by AJ Bell. 

Miners stay strong

Surprisingly enough, though, these will continue to be the commodity biggies Evraz (LSE: EVR), BHP, and Rio Tinto (LSE: RIO). At first glance, this was counter-intuitive to me considering that industrial metal prices are expected to correct this year, which in turn is likely to impact these companies’ performance. Still, Evraz is expected to yield a huge 17%, with BHP and Rio Tinto behind but still strong at 10.6% and 10%, respectively. 

The question for me is if I would buy them now. It turns out, that of the three, BHP will get delisted from the London Stock Exchange this year, so that is as far as the story for that stock goes. That leaves me with Evraz and Rio Tinto. I already hold both stocks in my investment portfolio, and have been quite happy in the past with their payouts. I mean, what is not to like about double-digit yields? 

Is this FTSE 100 stock any good?

But, if I had to buy more of their stock, would I do so? I could, but not for the dividends. This is because I think they are fraught with risk, especially that of Evraz. As the AJ Bell report itself points out “Forecast of yields of more than 10% may make investors a little wary, given the shocking record of firms previously expected to generate such bumper returns, including….Evraz…”. In the past decade alone, Evraz has cut dividends four times. Essentially this means that I should take the forecasts with a pinch of salt. 

Another dividend stock to consider

However, I am a bit more optimistic about Rio Tinto. The company has cut its dividend just once in the last 10 years. And it also has a slightly better dividend cover of 1.4 times compared to Evraz’s 1.3 times. Dividend cover is calculated by dividing the company’s earnings by its dividends. It helps to gauge how safe the dividends are. The bigger the cover, the more likely it is that they can be sustained and vice-versa. Ideally the cover should be around 2 times, which means that both the miners have less cover than desirable. Still, of the two, Rio Tinto’s is at least a shade better. 

Also, in relative terms, it is a slightly cheaper stock than Evraz. It has a price-to-earnings (P/E) ratio of 6.4 times, while Evraz is at 7.9 times. This means that my investments in it could have a better potential to grow. That said, I will decide whether or not to buy more of them depending on their next updates. If their performance and outlook are positive despite expectations for commodities as such, that might be a reason to load up on them. But for now, as far as commodity stocks go, I’d much rather buy this one. 

Manika Premsingh owns Evraz and Rio Tinto. 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 water utility Pennon (LSE: PNN) has streamlined its business over the past year. So, at first glance, a fall of 20% in the Pennon share price over the last 12 months may look bad. But it is important to realise that the company paid a £3.55 per share special dividend in the summer. That helps to explain the share price fall, as the company was returning funds to shareholders.

So, could this be a good time to buy Pennon for my portfolio?

A changing company

The special dividend was funded by the proceeds of Pennon’s sale of waste company Viridor. As well as helping fund the special dividend, the money the company raised from the sale has been put to use buying Bristol Water and buying back its own shares. I would rather the company had used cash to pay down some of its £2.4bn debt instead of buying back shares, but share buybacks can help boost a company’s earnings per share.

That means that Pennon is now a leaner group than it was before, with a clear strategic focus on water. I see pros and cons to that. It is good that the company can focus on a single area in which it already has deep expertise. I like the fact that customer demand for water is resilient. As it is often a form of regulated monopoly, it can be consistently profitable.

But the reduced diversification could hurt the company’s profitability, if for example a different regulatory regime comes into place for water prices. I also see substantial growth opportunities in waste and recycling due to growing green sentiment. So I do not think selling Viridor was necessarily the most value-creating move possible for shareholders in the long term.

Should I act on the Pennon share price?

It is a little hard to value Pennon right now due to the changes in the company’s business. In a year or two I think it will be easier to get a clear view on what the reshaped company’s revenues and profits will look like in future.

Pennon’s interim results in November showed a basic loss per share of 11.7p in a six-month period. Despite that, the company grew its interim dividend by 4.9%, to 11.7p. Once the reshaped business reports full-year results and its outlook, I think I will be in a better position to judge its future prospects.

My next move on Pennon

I like the fact that the company is focussed on serving shareholders. I feel it has shown that in the dividend increase, special dividend payment, and share buyback programme.  

For now I am going to keep watching Pennon without adding it to my portfolio. I continue to like the characteristics of the water business. Through its consolidation strategy as shown in the Bristol purchase, Pennon could grow its role in the water business. That holds out the prospect of economies of scale, which could boost future profit margins.

There are risks, as well. When acquiring competitors, overpaying is always a risk. The Bristol Water acquisition led to cash outflows of £434m, which seems a bit expensive to me given the modest size of the business. Concern about energy inflation could lead to political pressure to cap price increases by a range of utilities. That could hurt future profits.

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