One of the successful investors whose wisdom I apply when choosing shares for my own portfolio is Warren Buffett. Best known for running Berkshire Hathaway, Buffett managed an investment partnership for many years before that. So he has honed his share picking skills across a long and varied career.

Here are three of his investment techniques I use when buying shares for my own portfolio.

Think about a company not a share

The way Buffett thinks about shares is that they give him a chance to own a slice of a company. So he does not simply buy a share because it is cheap. Instead, he first assesses whether a company is one he would like to own as a whole if he could. Then, he looks at whether buying shares in it could offer him a way to own part of it at an attractive price.

That might sound obvious. But actually I think many investors do the opposite. Tempted by a high yield or a dramatic share price fall, some people buy stocks in companies they do not think are well run. One example of making this mistake myself was my purchase of Centrica. The shares looked cheap to me and the company had a good dividend history. But would I have bought a whole company involved in gas distribution and nuclear power at a time when the regulatory future for both activities was uncertain? I would not. Yet I bought Centrica shares.

Buy with no plan to sell

Buffett has said: “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”

That is a very clear investing philosophy. Buffett is buying for the long term with a plan to hold, not sell. He is not timing market dips. Buffett is not a trader, he is an investor. But a lot of investors would be happy to buy shares and sell them in less than a decade. So, why does Buffett think his way?

I think it is about what he is fundamentally looking for when buying shares. Buffett tries to identify businesses whose sustainable competitive advantages can allow them to generate profits for decades to come. Such companies can be rare. But if an investor finds one, buying its shares can mean huge rewards over the long term. It also reduces the need to buy and sell, with all the trading costs and work involved.

From day-trading to meme stocks, Buffett would not be interested. He is a long-term investor looking for great businesses with strong growth prospects.

Warren Buffett diversifies

The billionaire investor has made some incredible stock picks in his time. So, why did he not just go all in on them?

Take Apple as an example. Buffett made well over $100bn in paper profit in Apple shares in under five years. Yet he had tens of billions of dollars of spare cash he did not invest. Why did he not use it to buy more Apple shares?

The answer is risk management. He has operated in the stock markets long enough to know that even the greatest companies can encounter unexpected difficulties. Buffett sometimes talks about being greedy — but he is never so greedy that he fails to diversify his holdings.

Christopher Ruane owns shares in Centrica. The Motley Fool UK has recommended Apple. 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 often asked questions about investing by family and friends. One that cropped up over Christmas was: “Great investors like Warren Buffett say they avoid companies that have too much debt. But how much is too much?” 
 
It’s an important question, because too much debt can result in a financial restructuring that leaves existing shareholders owning a small fraction of the refinanced company. Or, in a worst-case scenario, suffering a complete wipeout of their capital. 
 
I could talk about past cases, like Thomas Cook, Carillion and Debenhams. But following a real-time unfolding situation is probably the best way to enhance your ability to judge how much debt is too much. 
 
To this end, I recommend closely watching developments at FTSE 250 cinemas group Cineworld (LSE: CINE) in 2022. 
 
Here, I’ll outline the current position of the company and what to look out for as the year progresses. 

Setting the scene

Cineworld was a heavily indebted company before the pandemic, due to its $5.8bn mega-acquisition of the second-biggest US chain, Regal Entertainment, in 2018. 
 
What’s more, in the winter of 2019, it agreed a debt-financed $2.1bn takeover of Canada’s largest operator, Cineplex. Although it aborted this when the pandemic struck, net debt was nevertheless substantial at $3.5bn (excluding lease liabilities). 

Jump cut

Fast-forward to Cineworld’s latest results (for the half-year ended 30 June). Net debt had ballooned to $4.4bn, with $4bn of lease liabilities on top.  
 
Trailing 12-month financing costs were $770m. To give this some perspective, the company’s profit before financing costs in the pre-pandemic year of 2019 was $725m. On these numbers, Cineworld’s level of debt is unsustainable.

Close up

Focusing on the near term, the balance sheet at the half-year end showed current assets of £0.6bn but current liabilities of £1.8bn. ‘Current’ refers to the 12 months from the balance-sheet date. In this case, the period to 30 June 2022. 
 
It means that if Cineworld retained its level of cash and received all the money owed to it in the 12-month period, it would be $1.2bn short of paying all the money it owes in the same period. This is called ‘negative net current assets’. 
 
Not all pandemic-hit companies are in a position of such weakness. Some even have positive net current assets. For example, Premier Inn owner Whitbread (+£0.6bn) and airline easyJet (+£1.5bn). 

The unfolding story

Cineworld’s lenders have already waived or amended a number of operating and financial covenants. Without this, the company would have failed to meet its obligations, and given its lenders the right to call a default and enforce early repayment of the debt. 
 
The current covenants will be tested at 30 June 2022 when net debt is required to be no more than five times EBITDA (earnings before interest, tax, depreciation and amortisation). 
 
The July-to-September quarter was a washout for Cineworld. And while it did report a positive performance in October, with revenue at 90% of the October 2019 level, it neglected to mention that October 2021 contained five weekends versus four in October 2019. This will have reversed in November. 
 
As things stand, with four loss-making months out of the first five, the likelihood of Cineworld avoiding breaching its 30 June net debt-to-EBITDA covenant is in the territory of a snowball’s chance in hell. 

A further twist

To make matters worse, since the last half-year end, Cineworld has taken on a further $200m of loans, and lost two litigation cases. It has to pay $262m compensation in connection with the Regal acquisition, and has an award against it of $970m for pulling out of the Cineplex acquisition. 
 
It intends to appeal the latter judgement. Well, it can hardly do otherwise. 

Denouement

If and when Cineworld breaches its 30 June net debt-to-EBITDA covenant, lenders could call a default, leaving the company’s shares worthless. 
 
It’s possible, but a more likely scenario is for lenders to insist on a financial restructuring involving a debt-for-equity swap. This is where lenders agree to write off a chunk of debt in exchange for new shares. 
 
Typically, in these situations, existing shareholders are left with only marginally better than worthless shares. 
 
At 32p a share, Cineworld’s current shareholders are collectively sitting on value of £440m. Based on experience, I’d expect to see this drop to somewhere in the region of £20m-£40m (1.5p-3p per share) in a debt-for-equity restructuring. 

Bonus footage

I’ll aim to revisit developments at Cineworld in the future. But to begin 2022 on a more optimistic note, there are plenty of reasonably priced UK companies with strong balance sheets for me to write about in the coming weeks.

Happy New Year!

G A Chester 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.

At the beginning of 2020, the BT (LSE: BT.A) share price plunged in line with the rest of the market. The stock dropped 50% to below 100p as investors re-evaluated the group’s prospects. 

Since then, the stock has recovered. Last June, it returned to its pre-pandemic level of 200p on takeover speculation, although it could not hold this level for long. The shares soon dropped back below 140p. 

Since then, investors have been steadily returning to the group. Indeed, the stock is up around a third since the last week of October. And I think there could be further gains to come. In fact, I reckon it is likely the BT share price will hit 200p again in the next few months. 

Multiple catalysts

I believe multiple catalysts could push the BT stock higher this year. Leaving aside the takeover rumours, there are plenty of reasons to be optimistic about its outlook. The company’s decision to focus on enhancing customer service and invest in its infrastructure is starting to pay off. Initial indications show that consumers are returning to the group, and their opinion of the corporation is improving. 

The results of this strategy are not expected to filter through to the firm’s bottom line until the financial year ending March 31, 2023. While we will not get the whole picture until next year, the company’s interim results for the 2023 fiscal year should be published towards the end of 2022.

If these results show that the company is on track to return to growth for fiscal 2023, the market’s view of the business could quickly change. If BT can return to growth, it will be the first time since 2016 it has reported earnings expansion. 

Another reason I am optimistic about the outlook for the stock is the potential for dividends. Alongside its financial results for the fiscal year ending March 31 2022, City analysts are expecting the firm to announce a substantial dividend for the period. They have pencilled in a dividend for the fiscal year as a whole of 7.5p, giving a yield of 4.4% on the current share price. If the company does meet these projections, income investors could return.

Analysts are also forecasting earnings per share (EPS) of 20.4p for fiscal 2023. Historically, the stock has traded at a price-to-earnings (P/E) multiple of around 10. If it returns to this level, EPS of 20.4p imply the shares could be worth 204p. 

BT share price outlook 

These are all reasons why I think the BT share price can return to 200p this year. However, I also need to consider the challenges the company may encounter as well. 

Rising interest rates will increase the cost of the group’s debt, which is substantial. Higher interest rates could potentially hold back the firm’s return to growth if it has to set aside more money to cover costs. Competition in the telecommunications sector is also increasing, and BT must work harder to maintain its market share. 

Despite these risks and challenges, I would be happy to buy the stock for my portfolio today, considering its outlook. As BT returns to growth, I think the market will take a more favourable view of the business. 

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.

Renewable energy stocks are popular at the moment, but I reckon it’s still possible to find decent value in this sector. I’d like to add some exposure to renewables to my passive income portfolio so I’ve identified two companies I’d like to buy.

I expect these two shares to offer a combined dividend yield of 6% in 2022 — and potentially for many years beyond. However, it’s worth remembering that dividend payments are never guaranteed. I wouldn’t plan to use my dividend income to replace cash savings.

#1: Solar-powered dividends

My first choice is NextEnergy Solar Fund (LSE: NESF), which operates solar farms across the UK,  Italy and Spain. At the end of September, NextEnergy had 99 assets with a total capacity of 895MW. These were valued at just over £1bn, so it’s a substantial operator.

You might think the UK is not the most profitable place to install solar panels, and I’d probably agree. However, more than 90% of NextEnergy’s generating capacity is backed by government subsidies and long-term power purchase agreements. This means revenue is far more predictable (and higher) than it would be otherwise.

Indeed, the biggest risk I can see for investors is that these government subsidies will be scaled back in future years. This might mean that some of NextEnergy’s UK operations would become less profitable — or even loss-making.

The good news is that its management is already taking steps to address this risk. One change is that the company is selling more energy directly to large electricity users, such as Budweiser brewer AB InBev. NextEnergy is also investing in battery storage and expanding its overseas operations in warmer countries where solar power is more productive.

NextEnergy stock currently trades broadly in line with its book value of 103p per share. Management has said it intends to pay a dividend of 7.16p per share for the year ending 31 March. This gives a potential yield of almost 7%. I think the shares are attractively valued and would buy them for passive income.

#2: Inflation-linked dividends

Wind power is a more obvious way to generate renewable energy on our small island. I’ve been following wind farm owner Greencoat UK Wind (LSE: UKW) for a number of years now and my view remains very positive.

Although most of Greencoat’s farms also receive subsidies, my feeling is that these may be less important. With generating costs coming down, I believe wind power will become profitable without subsidies in the UK.

My main concern with this business is that the rush of new money into renewables could push up the cost of acquiring new wind farms. That could put pressure on shareholder returns. However, Greencoat seems to have managed this risk successfully so far.

I’m also encouraged to see that respected City asset manager Schroders is buying into Greencoat Capital. Confusingly, this is a separate company that manages the investments made by Greencoat UK Wind.

The Schroders deal shouldn’t change anything for UKW shareholders. But I’m impressed by the City firm’s involvement. Schroders has a reputation for long-term thinking.

Greencoat shares offer a 5.3% dividend yield, based on management guidance for 2021. The company also aims to link dividend growth to inflation. For these reasons, I see Greencoat UK Wind as an attractive buy for my portfolio in the current market.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind and Schroders (Non-Voting). 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 past five years have been tough for Rolls-Royce (LSE: RR). Even in 2019, before the pandemic, the aerospace firm reported large operating losses. This was mainly due to a £1.4bn exceptional charge linked to problems with its Trent 1000 engine. The pandemic has since led to further problems as the airline industry almost completely ground to a halt in 2020. Given these problems, an investment in the company five years ago would have been a bad one.

So, what are the figures?

Exactly five years ago, the Rolls-Royce share price sat at 653p. This means that with £1,000, somebody would have been able to buy around 153 Rolls-Royce shares. The share price has seen an 81% decrease from this level and is currently just 125p. Therefore, 153 shares of Rolls-Royce at its current price would only amount to £191.25, equivalent to an £808.75 loss. This demonstrates some of the risks in investing in stocks, especially in volatile sectors such as aerospace.

Fortunately, although dividend payments are currently barred under the company’s loan agreement, it has made some in the past. Indeed, since January 2017, the firm has paid out 35.1p per share. This means that shareholders would also have made £53.70 from dividend payments in this period. But while this helps to eliminate some of the losses, a £1,ooo investment in Rolls-Royce would still only total around £245 today.

Can the future for Rolls-Royce shares be any better?

Clearly, the past performance of Rolls-Royce has been pretty dreadful. But past performance does not necessarily equate to future performance. Indeed, while the risks of the pandemic remain prominent, there are still a few positives for the aerospace and defence company.

For one, it’s currently working hard on restoring its balance sheet. This has included the €1.7bn sale of its ITP Aero business in Spain to Bain Capital, and most recently, a €91m sale of its Bergen Engines business to Langley Holdings. All in all, it hopes to raise around €2bn from asset sales, which will be used to reduce debt. This will hopefully enable it to regain an investment-grade credit rating, so that it can borrow money more cheaply.

Despite the emergence of the Omicron variant, things are also starting to look more positive in its core business. In fact, in the third quarter it saw a return of positive free cash flow. Further, through the company’s restructuring programme, it also expects to achieve around £1.3bn in savings by the end of 2022. This could help the firm’s profitability in the long term.

I think that its situation is likely to be far better in the next five years than in the past five. While several short-term issues remain, especially the fact that large engine flying hours are still only 50% of pre-pandemic levels, Rolls-Royce has still navigated the pandemic well. For the long-term future, I may, therefore, add some Rolls-Royces shares to my portfolio.

Stuart Blair 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.

Charlie Munger, the billionaire investor and close associate of Warren Buffett, recently doubled his holding in Chinese e-commerce business Alibaba (NYSE: BABA). 

I should clarify that Munger bought the holding for the portfolio of Daily Journal Corporation. He is the chairman of the company and manages its extensive investment portfolio. 

As he has been buying the shares for the company rather than for his own account, I think this point is worth clarifying. In some respects, Munger is using other investors’ money as it is the group’s shareholders that ultimately own the Daily Journal’s portfolio. 

He has not said that he has bought the stock for his personal investment portfolio. Munger rarely comments on his investments, but we do know his most significant investment is Berkshire Hathaway. This holding accounts for the vast majority of his $2.4bn net worth. 

Still, after doubling the size of the Alibaba position in the Daily Journal’s portfolio, it is now the third-largest US equity position. I should also note that in the past 12 months, Munger has accumulated this position from scratch. In around a year, he spent $70m of the Daily Journal’s cash building the holding. 

Charlie Munger’s investments 

Considering Munger’s reputation and success as an investor, I like to keep an eye on his investments. Some could be a good fit for my portfolio. 

When it comes to Alibaba, I think the company has a lot of potential. Its position in the market suggests that it should be able to capitalise on the growth of the Chinese economy over the next couple of decades. Indeed, analysts expect the Chinese e-commerce market to grow at a compound annual rate of around 12% over the next five years. 

If Alibaba can ride this wave and increase its market exposure simultaneously, its sales growth could exceed this rate of expansion. The company also has a vast amount of consumer data that it can use to sell other products and services.

However, as I have noted before, I am worried about the company’s listing structure. The tug-of-war between US and Chinese regulators is also concerning. Regulatory actions could destabilise the group and ruin its growth potential. It is almost impossible to predict if regulators will move against the corporation and other listed Chinese businesses.

Index fund 

Considering these risks, I am not going to invest in the company. Nevertheless, I do own a Chinese equity market tracker fund. Alibaba is one of the key holdings in this fund. As such, I do have some exposure to the e-commerce retailer. 

So overall, while I am not following Charlie Munger into Alibaba, I am happy to have some exposure to China in my portfolio. I think the best strategy for me to do this is to use an index fund. This diversified approach should help spread the risk around individual opportunities. 

Rupert Hargreaves owns Berkshire Hathaway (B shares). 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.

Markets are cyclical, so over time they move up and also down. Many investors live in fear of a stock market crash and seem to spend half their lives expecting one. That is why some people joke about investors who have predicted eight of the last two stock market crashes.

But a crash is a serious thing. It can be scary. It can also present incredible opportunities. Here are four ways I would seek to profit in a stock market crash, whenever it comes.

1. Buy quality on sale

One of the most attractive things to me about a stock market crash is that it lets me buy what I regard as high-quality, blue chip companies while their prices are unusually low. That gives me more bang for my buck.

Take a company like Legal & General, for example. I like its established business, its iconic brand, and the cash generative nature of its business. That enables it to pay out dividends with a yield of 5.9%.

But if I had bought the shares in March 2020, I could have bought them for 51% of what they trade at now, at the time of writing this article yesterday. So I could have got almost twice as many Legal & General shares for my portfolio then as the same money would buy me today.

Crashes often throw up very cheap prices for only a short amount of time. What if I wasn’t ready to buy when Legal & General crashed in March 2020? After all, an insurance company faces risks such as price competition and unexpected payouts due to novel situations. So maybe I wouldn’t have fancied Legal & General in March 2020 without researching the risks more fully.

Well, I could have bought it half a year later, in September 2020. The price was higher than it had been in March. But it was still only 58% of where it stands now. Crashes often work like that. Just like an earthquake, there are tremors beforehand and aftershocks later on. So even if I cannot get the shares I want at their cheapest point, a crash may still throw up a lot of good opportunities to buy them in the following months or years at a more attractive valuation than before.

But some crashes are very short. That is why I think it is helpful to make a shopping list beforehand of companies I think could be good additions to my portfolio. I will not have enough time to do that research properly in the heat of a crash.

2. A stock market crash can offer higher yields

There is something else I missed by not buying Legal & General at those March 2020 low prices. Not only did I miss out on a share price gain, I also lost the opportunity to get a double-digit yield.

While the 5.9% yield today attracts me, if I had bought back in March 2020, the same shares would be yielding 11.5% today based on my purchase price. That is because a dividend yield is a percentage of the price one pays to buy a share. So, the cheaper I can buy a share, the higher the yield will be if it pays a dividend in future.

There were other double-digit yield opportunities I missed in the crash too. For example, asset manager M&G yields 8.9%. But if I had bought it on 20 March 2020, the current yield would be a mouth-watering 16.6%.

3. Learn one’s own investing psychology

Something many people underestimate about investing is how much of it is about temperament. Indeed, legendary investor Warren Buffett says, “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd“.

A lot of investors think they know their own temperament. But, as Rudyard Kipling’s poem If reminds us, it is easier to behave calmly and rationally when everyone else is doing the same thing. In a market meltdown, by contrast, behavioural cues can be confusing. Fear stalks many investors’ minds as they see the value of their portfolio fall rapidly and sometimes dramatically.

Anybody who invests for a long enough time will experience a market crash. I think that can be valuable in helping one understand one’s own psychology. What makes someone do well or badly in such a situation is not necessarily the crash itself. Rather, it is how they respond to it.

To understand one’s investing psychology and prepare better for future stock market crashes doesn’t just happen. It requires honest, disciplined analysis of what went well and what went badly.

4. Move into recovery themes

A crash can offer me another opportunity, which is to move into investment themes that I think could do well after a crash.

A lot of the economy is cyclical to some extent. That can mean that the economic factors that drive a crash can also lay the foundations for its recovery. Consider oil and gas as an example. In 2020, energy stocks plummeted. To cut costs, companies slashed their capital expenditure plans by tens of billions of pounds. But spending less on oil exploration today means there will be less oil available in future. That could drive up prices if demand stays the same while supply shrinks. So when Exxon slashed spending in the last crash, I took it as a buy signal for my portfolio. That has turned out well for me, but there are risks in buying companies whose plans have been thrown into doubt. Sometimes, their businesses never recover. Reduced capital expenditure could simply reflect reduced future customer demand.

It can be easy after an event to figure out what the investment theme was. After a while in lockdown, for example, a surge in home delivery seemed inevitable. But it can be hard to identify such themes before they happen. That is what I would seek to do, to buy possible post-crash winners when they are deeply discounted.

Christopher Ruane owns shares in ExxonMobil. 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.

When looking for passive income stocks for my portfolio, I like to focus on companies with the most sustainable dividend yields. This does not necessarily mean high yields.

It means I am looking for corporations paying attractive dividends that they can afford without having to take on debt or skimp on reinvesting back into the business. 

With that in mind, here are three passive income shares I would buy today, all of which yield more than 7%. 

Trading income 

The first company is the financial services group Plus500 (LSE: PLUS). This firm generates revenue from traders who place deals on its platforms. By taking a tiny slice off each trade, the enterprise is able to generate significant profits and hefty profit margins. As part of this model, profits tend to rise during periods of market volatility and fall when traders are sitting on their hands. 

This means it has the capacity to produce significant dividends for investors. At the time of writing, the stock offers a dividend yield of 7%, although it could vary going forward. Indeed, the company has a track record of returning more cash to investors when profits are rising and less during periods of declining sales. 

Some challenges the group may face include competition and regulations. These could hurt its profit margins and lead to reduced shareholder returns. 

Passive income diversification 

Henderson Far East Income (LSE: HFEL) presents a way for me to build exposure to a diverse portfolio of income investments across Asia. 

I think this strategy makes a lot of sense for my portfolio, as it will help me build exposure to different regions of the world and diverse businesses.

At the time of writing, the trust offers investors a dividend yield of 7.9%. This is backed up by income from its top holdings, including Bank of China, Samsung Electronics and Taiwan Semiconductor. 

One significant benefit of dividend investing with income trusts is they can manage their payouts. Trusts can hold back a quarter of their income every year to build a revenue reserve. These companies can then use this to cover their dividends to investors if the holdings in the portfolio cut their payouts. As a result, investors are insulated from individual business actions to a certain degree. 

A downside of this approach is that funds can charge high management fees. These can eat away at returns in the long run.

Growing business 

Jupiter Fund Management (LSE: JUP) is my final passive income buy. Over the past five years, this firm has built a niche in the fund management industry. Thanks to its strong reputation with customers, assets under management recently hit a record high. 

As assets under management have expanded, so have management fees. This generates a steady stream of income for the company, which it can then return to investors. At the time of writing, the stock offers a dividend yield of 7%. There is room for growth in the years ahead as assets under management continue to build. 

Some risks that could hold back growth include completion from larger peers. A price war in the fund management sector could drive down Jupiter’s profits. An increased regulatory burden may also impact the company’s profit margins.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management. 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.

Was this article helpful?

YesNo

I think there are many reasons why dividend stocks are a smart buy at the moment. Low interest rates on my cash balances, high inflation negatively impacting my returns, and generous dividend yields are a few that spring to mind. When trying to figure out the top dividend stocks that merit an investment, here are a couple I’d consider buying right now.

An established top dividend stock

First up is Legal & General (LSE:LGEN). The business has been established for over 100 years, offering a wide range of financial services. At the moment, it specializes in pensions, retirement products, and asset management.

I await the full-year results that are due out in March. The half-year results released back in August were strong, with operating profit up 14% on the same period in the previous year. An important factor for a top dividend stock is growth in dividend per share. The interim dividend of 5.18p was up 5% on the dividend from H1 2020.

As a result, the current dividend yield is 5.94%. Given the consistency of the business model, I’d expect full-year results to show further steady growth. This bodes well for a continuation of the dividend payout in 2022. Of course, dividends are never guaranteed.

Over the past year, the share price is up almost 10%. Looking forward, there’s a potential risk that the company might struggle with the asset management element. Many are predicting that 2022 will be a much harder year to navigate financial markets. If the assets under management aren’t selected carefully, LGEN might see investor outflows if performance isn’t very good.

Strong outlook from a homebuilder

The second company I think is a top dividend stock is Barratt Developments (LSE:BDEV). The share price is up 9.8% over one year. The company cut the dividend during the pandemic, but was able to increase it last year thanks to strong results. At the moment, the dividend yield is 3.98%. 

Some might criticize this choice, saying that with inflation above 5%, the dividend yield here still offers me a negative real return. This is true and is a risk when considering the stock on its own. However, I’d add this top dividend stock to my overall portfolio. Given that this could include LGEN (yielding almost 6%), and other higher yielding ideas, my average yield should be higher than 5%. 

The main reason why I like the stock is that the outlook is positive. Therefore, I wouldn’t be surprised if the dividend per share increases in the next year or so. The forward order book is strong, highlighted in a trading update in October. The update noted that “total forward sales (including JVs) as at 10 October 2021 totaled 15,393 homes (11 October 2020: 15,135 homes; 13 October 2019: 12,963 homes)”. 

This growth year-on-year gives me confidence that the business is carrying forward momentum. This should enable the dividend to be sustained.

I’m considering buying both dividend shares as we start the new year.

Jon Smith and The Motley Fool UK have 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.