Berkshire Hathaway lists two S&P 500 ETFs in its holdings. SPDR S&P 500 ETF and Vanguard 500 Index Fund ETF. It’s true that they represent a tiny fraction of Warren Buffett’s company’s holdings at around $40m, but nonetheless, I find it interesting. Especially, when the Oracle of Omaha so often mentions the benefits for regular investors in holding such funds. 

I’ve already invested in an equivalent London-listed ETF for my own portfolio, but with 2022 approaching, I’m revisiting this ETF strategy again.

S&P 500 ETFs

The S&P 500 is widely considered the most important index in the US. It contains 500 large companies that are selected by a committee. Firms must have a big enough market cap, at least 10% of their shares outstanding and meet liquidity and profitability requirements.

It includes big-name companies such as Microsoft, Apple and Amazon. In terms of industries, the index includes a variety of sectors such as technology, retailers and banking.

As such an important index and essential barometer of US stock market health, it’s no surprise that there are lots of ETFs available.

The funds I’m interested in for my own portfolio are the ones listed on the London Stock Exchange. These allow me to easily and cheaply buy shares in an S&P 500 ETF using GBP. Most, if not all, of the major investment companies offer such an ETF and there’s just so much choice.

The largest one listed in the UK is iShares Core S&P 500 UCITS ETF at over £40bn. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.

There’s also the question of dividends. Some of the ETFs pay out dividends, some don’t. Personally, I like the income stream.

For my own portfolio, I’ve previously chosen Vanguard S&P 500 ETF (LSE: VUSA), as this seems to sit in the middle in terms of size ($47m) and costs (0.07%). The Vanguard fund has a current yield of 1.12%.

It’s no secret that over the last two years, the S&P 500 has performed well. This is reflected in the returns of the Vanguard ETF. At the time of writing, the share price is up over 30% for the year with a similar return over a 12-month period. The five-year performance is even better with a return of around 100%.

Should I still invest?

Despite the fantastic returns, looking ahead to next year, there are no guarantees of how the ETF will perform. Questions about inflation, government policy and potential Covid lockdowns are all on the horizon.

One downside of buying the ETF is that I limit my returns to those of the index. I could be wrong, but it’s possible that an uncertain market creates opportunities. By picking individual stocks I might be able to outperform it.

Also, this fund and the index itself only include US companies. Yes, many of these companies have revenue streams from outside the States, but the percentage has been falling over time.

However, on balance, going into 2022 I’m still comfortable including an S&P 500 ETF in my holdings as part of a diversified portfolio.

Niki Jerath owns shares in Vanguard S&P 500 ETF. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. 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, Apple, and Microsoft. 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.

In recent months, the UK retail grocery sector has been ripe with acquisitions. Two of the ‘big 4’ supermarkets – Asda and Morrisons – have been bought by private equity (PE) firms. This has largely been spurred by the sector’s resilience during the pandemic.

The interest in Morrisons led to its share price rocketing. It was purchased by CD&R for just under £10bn, including debt. This equated to a 287p per share offer, over 60% higher than the pre-acquisition announcement price.

M&S (LSE: MKS) has proved itself as one of the hottest FTSE 100 stocks this year, delivering over 80% year-to-date returns. In mid-August, on the Morrisons news, the M&S share price jumped over 25% as investors saw it as another potential target. If this did occur, I think we could see the share price of the FTSE 100 stock explode.

Acquisition case for M&S

In my opinion, there are three key factors that highlight M&S as an attractive investment opportunity for a private equity firm.

The first is strong cash flows. The PE model rests on using large amounts of debt to fund an acquisition (called a leveraged buyout). The aim is to pay down this debt using the cash flows produced from the acquired company, building the PE firm’s equity stake in the company. The company can later be sold and the difference in starting and ending equity value is the return on investment. In order for this model to work, the company needs strong, stable cash flows. M&S has just that, delivering £296m cash in 2021.

Them there’s its large property value. One thing that’s particularly attractive about M&S and many retail grocery firms is the large amounts of property they hold. For example, at present, M&S has an estimated £1.8bn worth of property. This is attractive for PE firms because this property can be sold to help fund transaction costs.

The low-interest-rate environment is a broader factor that makes PE investment very attractive. This makes raising capital and sustaining debts very cheap. This is critical for PE firms as their whole acquisition model relies on using large amounts of debt.

Potential risks

Although the above factors highlight the attractiveness of M&S shares, there are still risks that must be considered if I were to consider a purchase. One such risk is the fact that although current interest rates are very low, many investors are expecting them to rise very soon to combat rising inflation. If this is the case, then it will make it harder to raise capital and PE investment will be less attractive.

M&S has already increased its online delivery presence through its 50% stake in Ocado. The pandemic has vastly accelerated the shift to online grocery shopping. While this is encouraging, it also means that M&S will have to compete with a much wider range of grocery delivery firms moving forward. It will have to successfully navigate this competitive landscape if it wants to carry on delivering good results. 

I think M&S is one of the most attractive FTSE 100 stocks for a PE acquisition that could drive a steep share price rise. But acquisition talk aside, I think M&S’s strong results and online presence could make it a great investment opportunity for my portfolio as an independent company. Those features that make it attractive to PE firms, make it attractive to me too!

Dylan Hood 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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Dividend stocks are a great way for me to generate passive income. I also have the option of reinvesting my dividends to buy more shares, which should mean I get an even bigger passive income next year.

What’s most important, though, is buying shares that pay out dependable dividends. This is because dividends are never guaranteed. Companies have to remain profitable before they consider paying dividends to shareholders like myself.

With this in mind, here are two companies I’m considering for my income portfolio that have paid consistent dividends over the years.

A dividend stock to count on

The first company is BAE Systems (LSE: BA), a provider of military equipment and security systems for governments across the world. The UK’s Ministry of Defence and the US Department of Defense are both major customers of BAE Systems. Revenue can typically be quite stable as these governments have to maintain and upgrade their security capabilities each year.

City analysts are expecting the dividend yield to be 4.5% in 2022. This isn’t huge like some other FTSE 100 stocks. But I still view this as a respectable dividend for my portfolio.

However, it’s the consistency of dividends here that I’m drawn to. In fact, BAE Systems has paid a dividend every year going back to at least 1992. This covers the dotcom bubble, the financial crisis, and most recently the pandemic. This is an impressive run of dividend payments.

Another dividend stock

The next company is Rathbone Brothers (LSE: RAT), an investment and wealth management business.

Jumping straight to the dividend forecast and this is a decent 4.1% for next year. Again, it’s not huge like some UK stocks, but I still consider this high enough for my income portfolio.

Rathbones Brothers has been able to pay a regular dividend over the years too. In a similar way to BAE, the company has paid one every year since at least 1992. This track record means there’s a good chance it’ll pay a dividend again in 2022.

Risks to consider

It’s important that I review a company’s history of dividend payments before I invest. However, this doesn’t guarantee that a dividend will be paid in the future. If either BAE Systems or Rathbones Brothers struggles in the year ahead and profitability falls, there’s a good chance the dividend will be cut, or worse, stopped altogether.

Rathbones Brothers generates fees on its assets under management, so a stock market crash could really impact the company’s profits. If this does happen, I expect the dividend to be reduced.

As for BAE Systems, it has to keep developing its technologies to keep up with global demand for security. There’s always a risk of losing a key government contract to a competitor, which would significantly impact its profits.

On balance though, I’m looking to buy these dividend stocks for my portfolio.

Dan Appleby owns shares of BAE Systems. The Motley Fool UK has recommended Rathbone Brothers. 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.

2021 has been a good year for oil and gas generally. Oil is up by over 50% this year, as is natural gas. The share prices of natural resource exploration companies are largely reliant on the value of these commodities, so it’s no surprise that they’ve had a stellar year.

In fact, at the time of writing, iShares Oil & Gas Exploration & Production UCITS ETF (LSE:SPOG) is the best-performing ETF of the year.

The ETF

I’ve always been a fan of ETFs (exchange traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost.

This particular ETF aims to track the S&P Commodity Producers Oil & Gas Exploration & Production Index.

This index measures the performance of some of the largest publicly traded firms involved in oil and gas extraction and development from around the world. The companies must also meet liquidity and market capitalisation requirements to be included.

Quite simply, this fund has had a phenomenal year. Year to date the fund has increased by over 70% and over 12 months the performance is similar.

Looking into some of the holdings reveals some heavyweight natural resources companies. The two biggest holdings are ConocoPhillips and EOG Resources. The former is Alaska’s largest crude oil exploration and production company. The latter is a Fortune 500 company headquartered in Texas. Both firms are in the oil discovery and processing business with operations in the US, Middle East, Europe, and Asia.

Canadian Natural Resources, is the third-largest holding in the fund. It’s one of the biggest independent crude oil and natural gas producers in the world.

Should I invest?

The increase in the share price of this fund is ultimately because of the rise in the value of oil and gas. As the world has come out of lockdowns, soaring demand combined with surging business activity has rapidly increased energy prices.

However, the 2022 price outlook for these commodities is far from certain. On one hand, the International Energy Agency projects oil demand to recover to pre-pandemic levels in 2022. However, according to an S&P report, the price of oil should stabilise in 2022. On balance, I think that the price of oil and gas in 2022 will be largely determined by Covid variants and possible lockdown restrictions. A surge in the new Omicron variant, identified by the World Health Organisation as potentially very high-risk, has already seen the price of oil fall.

For this reason, despite this being the best-performing ETF of the year so far, I’m happy to wait and see what happens to energy prices in 2022 before adding it to my own portfolio.

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

I’ve been looking at a FinTech penny stock for my portfolio. Not only is the FinTech sector growing at a rapid pace, but penny stocks can sometimes offer outsized returns.

The company I’ve been analysing is Equals (LSE: EQLS). It offers a range of products, including international payments, bank accounts and credit facilities, plus multi-currency cards and travel cash. The company pivoted its strategy three years ago to focus on its business-to-business (B2B) solutions. Today, Equals derives the majority of its revenue from its international payments operation.  

Let’s take a look to see if I should buy this penny stock in my portfolio.

The bull case

I’m excited by the growth potential of the FinTech sector. It’s an area that’s expected to grow by over 23% on a compound annual rate between 2021 to 2026. Indeed, Equals is confident of challenging incumbents in the financial services sector. Its ambition is to become the leading payments company of choice for small and medium-sized enterprises, which I view as a huge potential growth avenue for Equals.

The company is also performing well right now. In a trading update released on 8 December, Equals said it has significantly exceeded full-year expectations for both revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). This is exactly what I want to hear as a potential investor. A significant international payments transaction for a large corporate client played an important role in the outperformance. This shows to me that the company’s strategy is working well.

The bear case

Although the share price has had a strong run in 2021, and is up a huge 128% as I write, it remains under the all-time high it reached in 2018 of 150p. In fact, the share price crashed by an eye-watering 85% from this high when it reached a low during the Covid sell-off in spring 2020. This kind of volatility is always something to keep in mind when investing in a penny stock.

Equals has been loss-making in its last two financial years. Investing in companies that don’t make a profit is always riskier as any downturn in trading may lead to significant financial distress.

Finally, the FinTech sector is highly competitive. That’s generally the case when a disruptive sector is growing at pace as it attracts new and ambitious companies to the market. I wrote about Wise recently, which operates in this sector. There’s a risk that Equals may have to reduce its prices to remain competitive in its main international payments business in order to remain competitive.

Is this penny stock a buy?

Taking everything into account, I do like the investment case here. The general growth in the FinTech sector acts as a tailwind for Equals. The pivot towards its B2B solutions has proved successful so far too. The valuation isn’t particularly demanding either as the price-to-earnings ratio for next year is currently 19.

I’m strongly considering this penny stock for my portfolio.

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.

The Rolls-Royce (LSE: RR) share price is shaking wildly as the Covid-19 crisis ramps up. Fears over its recovery as travel restrictions return have ratcheted up several notches. Now the FTSE 100 engineer is trading at near-three-month lows of 120p.

A case could be made that Rolls-Royce’s share price could now be too cheap for me to miss. City brokers think earnings at Rolls will soar 307% in 2022 as the aviation industry rebounds.

This leaves the business trading on a forward price-to-earnings (PEG) ratio of 0.1. A reminder that a reading below 1 suggests a UK share could be undervalued by the market.

On the right path…

To recap, Rolls-Royce’s share price took a hammering in 2020 as profits slid and debt levels soared. Coronavirus-related travel curbs reduced flying hours of its engines and decimated demand for its maintenance services. Concerns that orders of its hardware could slump if airlines go to the wall also spooked investors into selling their holdings.

A steady recovery in flying hours, along with a solid start to company restructuring, helped the Rolls-Royce share price recover some ground in 2021. Financials this month showed large engine flying hours back at 50% of 2019 levels, up from 43% as of June. It announced too that it had achieved £1bn worth of cost savings so far and chalked up £2bn worth of disposals.

Critically, this restructuring — along with the steady recovery in civil aviation and solid performances in its Defence and Power Systems Division — meant Rolls-Royce returned to positive free cash flow in the third quarter, it said. Now it expects full-year cash outflows to be better than the £2bn previously predicted.

…but for how long?

This is important news, given the colossal amount of debt the group has on its books (more than £4.9bn worth of as June). It has perhaps proved that the company has what it takes to manage its debt-buckled balance sheet.

I wasn’t prepared to buy Rolls-Royce shares following the result however. Past performance is no guarantee of future success. The dangers to the company remain immense as the Omicron variant spreads. Indeed, the Rolls-Royce share price fell again despite the release of that positive trading statement.

As I said, the Rolls-Royce share price is cheap. But this reflects the uncertain outlook for the aviation industry and, by extension, aerospace engineers like this. The UK Business Travel Association recently described the reintroduction of mandatory Covid-19 tests for those entering Britain as a “hammer blow”. Countries across  the world are reimposing, or tightening, their restrictions too, creating a global problem for the travel sector.

Why I worry for Rolls-Royce’s share price

Last month, ratings agency Fitch slashed its global passenger forecasts for 2021 and 2022, due to Omicron. It also reiterated its expectation that the airline industry won’t return to pre-pandemic levels until 2024.

It’s possible the sector will perform better than predicted if increasing rates of vaccination play out. But this isn’t a risk I’m prepared to take with Rolls-Royce, given its enormous debts. I’d rather buy other blue-chip shares today.

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.

2021 has been another year defined by the pandemic. However, things have been brighter than 2020, with the FTSE 100 (LSE: UKX) index rising just under 11% year-to-date and year-on-year. As the UK continues to return to normality in fits and starts, the economy should keep growing. In addition to this, as my fellow Fool Rupert Hargreaves points out, 70% of the index’s profits are generated outside of the UK. This makes it a great opportunity to capitalise on both the domestic and global economic recovery.

Variant threats

The index recently saw one of its biggest daily drops. On 25 November, news of the Omicron variant drove the index 3.6% lower by the end of the day. The reason for this is the effects the pandemic has had on the global economy and could have again if the health crisis worsens. Lockdowns, supply shortages, and travel restrictions are just some of the challenges that Covid-19 has inflicted. These factors impinge on almost all businesses in one way or another. Subsequent reports have suggested that the Omicron variant isn’t as dangerous as first expected. However, its presence still highlights the ongoing threat that the virus poses. I think it’s safe to say that ongoing virus threats will hamper the FTSE’s growth throughout 2022 in one way or another. It just depends on how serious these threats are.

Another problem that I see affecting the FTSE 100 is inflation. Recent data highlight that prices have risen 4.2% in the UK and 6.2% in the US over the past year. In order to tackle this, central banks across the globe are deciding whether to increase interest rates. We’ve already seen the US Federal reserve try to combat inflation by tapering its government asset purchases, decreasing the amount of money in the economy. However, this doesn’t seem to be slowing inflation down, and therefore many investors are expecting a rise in interest rates.

To explain why this is bad for the FTSE 100, let’s use some basic economic theory. When interest rates are low, people invest because they can achieve a higher return than if they just let their money grow using interest. It’s also cheaper to raise debts and use these to invest with.  However, as rates rise, the opposite occurs. Some people turn away from investing in equities as they can achieve a similar return from interest on bonds and savings accounts. It also decreases the likelihood of investment as people have to pay more on loans.

FTSE 100 positives

Risks aside, I think the FTSE 100 still offers the safest way to capitalise on the economic recovery of 2022. A key reason for this is the fact that it offers such a diversified investment. Access to a broad range of sectors means that if any sectors underperform, they may be offset by others that are better performers. In addition to this, it allows investors access to all dividend-paying stocks in the FTSE 100. This is a great move to generate passive income for a portfolio.

Yet at present, I’m sceptical of how the FTSE 100 may perform in the next few months and throughout 2022. For me, its progress is heavily reliant on interest rates and how the pandemic impacts the world moving forward. I’m not convinced it can repeat 2021’s impressive growth in 2022. I would therefore hold back from adding a FTSE 100 investment to my portfolio today. 

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

I think UK share investors need to be careful buying penny stocks for 2022. The worsening Covid-19 crisis casts a shadow over the global economy for next year.

But there’s other issues that could derail corporate profits like China’s economic cooling and soaring inflation. News that US inflation hit 40-year highs last month certainly caught my attention.

Personally, I don’t plan to stop looking for penny stocks to buy. A company’s low share price doesn’t mean it’s in danger of significant profits trouble in 2022. Nor does it mean that it doesn’t have the financial strength to survive further economic volatility.

With this in mind, here are two top penny stocks I’m considering buying for 2022. I think they could help me make terrific returns beyond the next 12 months too.

A penny stock for the eco revolution

The growing importance of greener energy and waste reduction means Powerhouse Energy Group (LSE: PHE) could have a very bright future. It is a specialist in the field of creating synthetic gas from waste products like plastics. Gas which is then used to make hydrogen.

The waste-to-energy market is tipped for huge growth as concerns over the environmental impact of landfill sites increase. Analysts at Grand View Research think it’ll be worth $54.8bn by 2027, up from $33bn today.

Powerhouse is hoping its under-construction Protos project in Cheshire — which it expects will power up to a quarter of a million homes when it starts up in 2024 — will allow it to exploit this fast-growing market.

Powerhouse Energy’s share price could suffer significant weakness if delays in getting Protos up-and-running develop. This would be particularly problematic if costs spiral as a result. Still, as things stand today, I think there’s a lot to get excited about with this cheap UK share. Today, the company trades at 4p per share.

Turkish delight

I’m also considering buying DP Eurasia (LSE: DPEU) for my shares portfolio in 2022. This penny stock (which trades at 88p per share) looks particularly delicious in terms of value today. City analysts think earnings at the pizza seller will rocket 320%-plus next year. This leaves it trading on a forward price-to-earnings growth (PEG) ratio of just 0.1.

DP Eurasia is the master franchisee of the Domino’s Pizza brand in Turkey, Azerbaijan, Georgia and Russia. It thus has considerable brand power in an industry tipped for explosive growth in the years ahead. Latest financials showed system sales leapt almost 52% year-on-year during the 10 months to October.

My main concern for DP Eurasia is the growing economic instability in its key market of Turkey. Last week, ratings agency S&P slashed its outlook on the economy there due to soaring inflation. Still, I’m encouraged by the penny stocks impressive recent momentum, in spite of worsening conditions in its Turkish market.

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.

First it was Delta, now it’s Omicron… The Covid-19 variants have meddled with lives around the world, but as an optimist I have to try and take something positive from the current Omicron disruption. For me, Omicron has created plenty of cheap-looking shares, and I think the IAG share price in particular looks like especially good value at the moment.

The airline collective IAG (LSE:IAG) is understandably the type of business suffering because of the Omicron chaos. The way the world works at the moment, the new Covid-19 variant Omicron equates to stricter controls over international travel, which in turn discourages passengers from flying. This means lost revenue for IAG and other travel-focused businesses. I think there are sound reasons though why I should take a chance on the recent IAG share price dip being only a temporary blip.

Look at IAG’s 12-month share price

I feel like we’ve been here before with Omicron. Scroll back 12 months to when the UK went back into lockdown before Christmas in 2020, and the world felt like it was caving in once more. But remember what happened?

We all got through January 2021, the world began to feel a little bit more open again, and we got on with life as well as we could by the summer and autumn. Now, we’re on a bit of a downer again with Omicron.

Take a look at the 12-month IAG share price trend and see how it fits into that pessimism-optimism-pessimism pattern. Call me mad if you want, but I like to pay plenty of attention to the power of public sentiment being able to shift share prices. Public opinion rather than hard facts can sometimes do crazy things to stock markets, and I think IAG over the past year exemplifies this.

Strong IAG management response

I’m not quite mad enough to invest in a business on this basis only, so it’s important to understand the risks involved with investing in IAG. It’s evident every day that globally we are not yet out of the pandemic, and the longer it goes on the longer it takes to get back to full international travel. For a business running iconic international long-haul airline brands such as British Airways, Iberia and Aer Lingus, this is of course a problem.

I’m also well aware that IAG continues to operate at a loss. The losses are so big they look scary, but I think the recently reported operating loss of €485m needs putting into perspective.

IAG is not the only airline group finding times tough at the moment. The one thing the group does have on its side longer-term is those aforementioned strong brands. I also think that past brand marketing investment will pay off over the next few years. Access to €10.6bn cash in the form loans and the like won’t hurt IAG either.

All in all, IAG shares feel cheap to me right now. I’m getting stuck in this coming week, especially as I am happy to sit on the shares for the longer term. Time will tell how I get on!

Garry McGibbon has no position in any of the stocks 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.