For me, the most convenient way of generating passive income for life is buying shares that pay dividends. But choosing the right shares can be tricky.

Some of the businesses behind stocks are not suitable for a long-term approach to investing. If I pick the wrong shares, dividends could dry up later on. And sometimes a poor dividend performance can lead to a bad share-price performance.

So my strategy aims to avoid stocks that can’t deliver a reliable and enduring stream of shareholder dividends.

The wonderful few

And legendary long-term investor Warren Buffett demands high standards from his stocks as well. He reckons the market is made up of many companies with low-grade and mediocre businesses. But there are also a few exceptional ones.

And the excellent businesses he targets tend to work like money compounding machines. They likely increase their revenues, earnings and cash flow on average each year and spit out an ongoing stream of rising shareholder dividends. He calls such beasts “wonderful” businesses.

So my plan is to find Buffett-style wonderful businesses. Then I try to buy some of their shares at opportune moments when the valuation makes sense of a long-term investment.

But having bought shares like that, I then need to decide what to do with the dividends that keep arriving in my share account. And those dividends are passive income to me because I didn’t have to do any ongoing work to earn them. As long as I keep holding the stocks, and as long as the underlying businesses keep thriving, those dividends will likely keep on coming.

Building passive income potential

But I’m in the building stage of my portfolio, so I’m not taking the dividend money out to spend it. Instead, I’m reinvesting them back into the shares of wonderful businesses. And that’s because I want my gains to compound in value and become larger and larger over time. One day, I’ll switch to spending the dividends and, by then, I’m aiming for them to be larger than they are today because I’ve been compounding.

There’s nothing certain or guaranteed, of course. Even if I choose wonderful businesses I could still lose money. All stocks carry risks. But I reckon following the approach of successful investors could serve me well in the years ahead. And investing £5 a day in dividend stocks is a good place to begin.

The sum works out at just over £152 a month, or £1,825 a year. For the price of daily lunch out, I could be making a big difference to my financial future. And, for me, the best way is to invest that money every month. And I’d deduct it as an expense from my income before anything else. Then I’d put it in a tax-efficient ‘wrapper’ such as a Stock and Shares ISA, or a Self-Invested Personal Pension (SIPP). And within those accounts, I’d buy my stocks.

Kevin Godbold 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’m focusing on penny stocks today and the first one I’m looking at is ULS Technology (LSE: ULS). The share price is 72p as I write, but I think this could rise considerably from here.

The company provides software and services in the property, legal and financial industries. Its flagship offering is eConveyancer, which is an online comparison tool for residential conveyancing quotations. It also owns DigitalMove, another online platform that centralises and streamlines the conveyancing process.

It released its half-year report last week that showed revenue growing 48% to £10.2m. The gross margin also improved, reaching 40% and up from 38.8% in the same period one year ago. However, the business remains loss-making. The underlying loss before tax was £1.48m, which increased from £0.64m and does make this penny stock higher-risk.

The firm said this was due to continued investment in eConveyancer and DigitalMove. I think this is the right thing to do as these platforms have the potential to streamline the house-moving process. This is an area that’s ripe for disruption from a technology-led company, in my view.

However, what derisks this penny stock is its net cash position. As I write, the company’s market value is about £50m, but there’s cash totalling £23.1m on the balance sheet. This provides the management team with considerable flexibility to invest in its digital platforms.

There’s never a guarantee of success, of course, particularly if the housing market slows. But with a new CEO coming on board in 2021, and a robust balance sheet, I think ULS Technology could be a much larger business in 2022. It’s a buy for my portfolio.

Eating out

The next company is Restaurant Group (LSE: RTN) as the share price dipped back under 100p in October. The firm released a strong trading update in November and the shares almost reached 100p again. However, recent market weakness related to the Omicron variant has meant the share price has slipped back to 84p as I write.

Restaurant Group operates around 400 restaurants and pubs, including Frankie & Benny’s, Wagamama, and Chiquito. The trading update back in November said that the company was outperforming its market (defined as the Coffer Peach restaurant and pub benchmark in the trading update). Management then upgraded its guidance for adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) to a range of £73m to £79m.

I consider Restaurant Group a recovery play. With this in mind, the company should perform well next year as I believe there’s still a lot of pent-up demand for dining and socialising after lockdowns.

However, this does come with some risk. The company said recently it experienced a minor improvement in UK airport passenger volumes, which increased sales in its concessions business. Any further travel restrictions related to Omicron will likely impact this business division.

Nevertheless, I think this stock should continue to trade well next year as the demand for restaurants and pubs stays high. I’m considering adding the shares to 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.

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A little over a year ago, AIM-listed Mind Gym (LSE: MIND) was a penny stock. But the stock market rally of last November changed its fortunes. It quickly rose above 100p and has consistently stayed there through 2021. It is at more than double those levels now. And this is when the stock has already declined slightly in the last few months. 

Good performance

I think this is an encouraging place for me to explore the merits of the almost-penny stock further. The company, with a market capitalisation of around £170m, is clearly not small. And its latest results show that it is recovering fast from the pandemic too. For the six months ending 30 September 2021, the company’s revenues grew by a massive 67% compared to the corresponding period in 2020. Also, after crashing into losses last year, it has now managed to break even.

I also like the fact that for the last year and a half, which is essentially through the pandemic, there has been only one period of six months when it reported losses. And that was in the first six months of lockdowns in 2020, between March and September. For the past year, it has clocked either a net profit or broken even. 

It is also positive about the future. As per CEO Octavius Black “…we have demonstrated our ability to grow revenues… Mind Gym remains well placed to adapt and prosper in the vast, growing and rapidly evolving corporate change, learning and wellness market”. 

Trading below pre-pandemic levels

Despite this, the stock is yet to go back to its pre-pandemic levels. In early 2020, it had touched a high of 204p, so right now it is still trading some 20% below that level. Considering it progress over this time, I think its share price could rise more.

How much it rises, of course, depends on the pace of recovery. The Omicron variant is still a bit of an unknown, and has sparked off some panic. Additionally, winters make us more vulnerable even with vaccinations. My point is that we should not take it for granted that the pandemic’s market impact might be over. The stock markets are highly reactive these days even to relatively small developments that could potentially portend some serious bad news. 

And Mind Gym is in a segment that could be particularly susceptible to a decline if there is another slowdown. When companies are struggling to make ends meet, professional skill development might be put on the back burner, important as it is, in my view. Besides that, financially, Mind Gym’s bounce back has been relatively strong compared to last year, but not so much compared to the year before, which was the last pre-pandemic year. 

Would I buy this almost-penny stock?

Keeping this in mind, I would like to wait a while before making a decision on whether to buy the stock or not. It is a good stock in my view, but I still think that it could face some challenges in the near future if the economy continues to stay weak. I will keep it on my watch list though, and focus on buying other cheap stocks right now.

Manika Premsingh 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.

If the stock market crashes again I’ll be looking for bargains to buy for my shares portfolio. It’s not just economic-sensitive shares that get sold off when investor confidence sinks. Even companies with highly defensive operations can sink during a broader panic.

Here are three cheap UK shares I’d consider buying if they fall far in price. Each currently changes hands for less than £3.50.

A defensive hero

We have to spend to fill our bellies even when broader economic conditions worsen. This is why I think Devro (LSE: DVO) could be a top stock to buy if it falls amid a broader stock market crash. This cheap UK share manufactures sausage skins that it sells across developed and emerging markets.

I’ve long liked Devro because of the massive investment it has made in fast-growing developing territories, China, in particular. Meat demand in these geographies is tipped to keep rising strongly as personal income levels rise. Indeed, Devro’s latest financials said that it enjoyed strong growth in Latin America, the Middle East, and Africa during the four months to October. I’d buy the business despite the threat posed to its operations by the growing popularity of vegetarian and vegan diets.

Riding the petcare boom

People in Europe are spending more and more money to keep their companion animals happy and healthy. This is what makes Animalcare Group (LSE: ANCR) such an attractive stock in my book. Analysts at the Business Research Company think the global animal medicine market will be worth $85.1bn by 2030. That compares with the $42.5bn it was estimated at in 2019.

I am aware, however, that Animalcare (like Devro) could be hit by the rise of meat-free diets. This is because the business supplies medicines for livestock as well as for pets in Europe. Indeed, a report by Smart Protein over the summer showed that 46% of Europeans had reduced their meat consumption on a 12-month basis. Still, I think the bright outlook for the petcare market offsets this threat.

A consumer goods colossus

I bought Unilever shares because I considered it to be a relatively secure place to park my money. Products like Dove soap, Magnum ice cream, and Domestic bleach give it a market-leading position in ultra-defensive food and household and personal goods markets. I am also considering snapping up PZ Cussons (LSE: PZC) for my portfolio because it shares the same qualities. Brands like Imperial Leather soaps have been excellent sales generators for the business for decades now.

PZ Cussons has a great track record of innovating its powerhouse labels to keep consumers interested. And it has supercharged marketing investment in the likes of Imperial Leather, too. I also reckon the business will benefit from changing consumer attitudes towards hygiene following the Covid-19 outbreak. Despite the threat of rising raw material costs, I think PZ Cussons (like Unilever) could thrive even if the economic recovery runs out of steam.

Royston Wild owns shares of Unilever. The Motley Fool UK has recommended Devro, PZ Cussons, 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.

Stock markets have been a bit challenged recently because of the Omicron variant. But some stocks are still very much on the up. One such example is the AIM-listed investment company Duke Royalty (LSE: DUKE). The penny stock has shown a solid performance over the past year, with a 45%+ increase in share price. 

Duke Royalty gains

Now, it could be argued that many other stocks have also seen big increases over the past year. After all, last year around this time, the stock market rally had just about gotten underway. The real increases in stock prices were seen over the course of 2021. That is true of course, but not all stocks have maintained their increases. 

In fact, because of growing challenges from the withdrawal of policy stimulus, a potential slowdown of the Chinese economy, and high inflation, I can think of more than one stock whose gains from last year’s market rally have been all but wiped out. There are those that have sustained at least some of their gains, of course. To me these stand out, and Duke Royalty is one of them. 

Robust results, dividend payouts

I think there are plenty of reasons why Duke Royalty has been able to to hold onto its share price gains. First, consider the company’s recent results. For the six months ending 30 September 2021, the company reported a huge 78% increase in revenue from the corresponding time last year. And its net profits grew by a significant 50%. 

Next, its outlook is also robust. As per its CEO, Neil Johnson, it is expected to “exceed the market’s expectations for the 12 months ended 31 March 2022”. This could translate into an even higher share price. Companies that perform well consistently can often see a corresponding rise in share price as well. 

It also helps that the company pays a dividend. Its dividend yield is somewhat low at 2.3%, but I am not complaining. If I were to buy the stock, it would be for capital gains, but earning passive income alongside is always a welcome addition. 

Alternative financing

I also like Due Royalty’s business model, which focuses on royalty financing, as the name suggests. This is an alternative financing solution, in which the investor gets a percentage of revenues that a company earns. It might be a relatively new concept, but it is clearly working out well for the company. After struggling during the pandemic last year, it has been able to work its way back into the green now. 

Would I buy the penny stock?

And last but certainly not the least is the fact that it is a penny stock, priced at 45p as I write. And by the looks of it, I am hopeful that it might not remain so much longer if it continues to thrive. There is an ‘if’ there, though. The discovery of the new variant is really holding back recovery and might even send us back into lockdowns. Who knows! Considering that its portfolio companies are most likely to be small businesses, which are more likely to suffer in a slowdown, it could face a setback again. 

But, I think that over the next few years, it could make gains as the recovery takes root. I would definitely consider buying it in 2022.

Manika Premsingh 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.

FTSE 100 incumbent Hikma Pharmaceuticals (LSE:HIK) is a stock I would buy for my portfolio and hold for a long time. Here’s why.

FTSE 100 pharma giant

Pharmaceutical companies haven’t always had the best reputation. This has often resulted in negative investor sentiment. The rising costs of life-saving and essential medicines has contributed to this negativity. I believe Hikma is different from a traditional pharma firm. It manufactures generic, branded, and injectable pharmaceuticals and markets them at an affordable price.

As I write, shares in Hikma are trading for 2,265p. At this time last year, shares were trading for 10% higher at 2,522p. This is not a concern for me. In fact, I see it as a buying opportunity to pick up shares cheaper than usual. Looking back at the Hikma share price over a longer period, it has risen steadily over the past five years.

For and against

FOR: Hikma’s recent and historic performance is positive. I know past performance is not a guarantee of the future but I use it as a gauge nevertheless. I can see revenue and gross profit have increased year on year for the past four years. Recently, a trading update in November revealed guidance for full-year results is on track for another year of growth. 

AGAINST: Hikma is not the only pharma firm in its space where it attempts to manufacture cheaper alternatives to expensive drugs. This competition could significantly affect market share and performance. This would affect shareholder returns to existing investors and potential investors such as myself.

FOR: The current pandemic, as well as ageing population of the world, could benefit Hikma’s performance. Since the pandemic began, the likelihood of seeing a doctor or getting a hospital bed, especially in the UK, has declined massively. This has led many people to turn to over-the-counter options and with economic pressures weighing on people’s pockets, cheaper options are attractive. No matter the circumstances, medicines will always be required. 

AGAINST: The macroeconomic environment and current pressures could affect performance for Hikma and investor returns. Rising inflation and costs could eat away at margins. In addition to this, the labour market and shortage of workers could also affect operations and in turn performance. These issues are affecting other FTSE 100 picks for my portfolio too.

My verdict

I would add Hikma shares to my portfolio at current levels and hold them for the long term. I believe Hikma has a good market share in its sector to continue to grow in terms of performance and provide me good returns as an investor. It also continues to acquire businesses to enhance its offering.

I must keep an eye on risks that could derail progress but most of these are shorter-term issues, such as the macroeconomic issues I noted. At current levels I believe Hikma is a cheap FTSE 100 stock with a price-to-earnings ratio of 14.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

FTSE 250 incumbent Balfour Beatty (LSE:BBY) had a 2020 to forget thanks to the pandemic. The stock looks dirt-cheap right now. But its 2021 performance and outlook have picked up. Should I buy shares for my portfolio? Let’s take a look.

Infrastructure giant

Balfour Beatty is a leading international infrastructure group with offices and a presence in the UK, US, and Hong Kong. It employs approximately 26,000 people and has roots stretching back over 110 years.

As I write, Balfour shares are trading for 245p, which is a 7% drop compared to a year when shares were trading for 265p. More notably, shares have dropped close to 25% since August, when they were trading for 319p. Current macroeconomic pressures seem to have affected the company’s share price and investor sentiment.

For and against

FOR: During the pandemic and since reopening, demand for construction services has been rising. In fact, the UK government has committed to spending £100bn in the next few years on infrastructure. A firm like Balfour Beatty with its experience and huge construction arm should benefit. This could boost performance, growth, and investor returns.

AGAINST: A major issue is that when there is any economic uncertainty, the construction industry is usually affected. It is also worth noting that the construction industry has usually been seen as a low margin sector. With current headwinds such as rising inflation, costs, and the supply chain crisis, market conditions could affect Balfour Beatty’s performance and any investor returns. Other FTSE 250 stocks I am reviewing for investment could suffer at the hands of the same issues.

FOR: Since reopening, Balfour Beatty has shown good levels of performance and I believe these will continue. It released a half-year update back in August that made for good reading. Underlying profit stood at £60m compared to 2020, when it reported a £14m loss. Net cash had increased and its order book was also very close to 2020 levels, which is pleasing to see. I only see this increasing as demand for construction services grows. An interim dividend of 3p was declared, which is higher than pre-pandemic 2019 levels.

AGAINST: Balfour Beatty is in a saturated market and there is lots of competition for the same business and projects. Despite its size and reach, there are still other firms looking to gain the competitive edge and take contracts from it. This could affect performance and any returns I could receive as a potential investor. Competition is something I consider among all my picks.

FTSE 250 opportunity

At current levels, I believe Balfour Beatty is a good opportunity for my portfolio. I would happily add the cheap shares to my portfolio. It has the necessary reach, balance sheet, experience, and fundamentals to navigate difficult waters and return to pre-pandemic levels of performance and growth.

Analysts believe the stock is trading at a forward price-to-earnings ratio of just 12 based on its growth outlook. This is extremely attractive and undervalued in my opinion. It is worth noting not all investors like the construction industry due to its volatility but I am happy to buy shares right now and I expect returns over the long term.

Jabran Khan 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.

Synthomer (LSE:SYNT) shareholders, like myself, have had a bit of a shock today. The Synthomer share price is down 13.56%, which takes it down about 8.5% over a year. The company has reported no news today. The FTSE 100 and FTSE 250 are in the green, so the Synthomer share price crash cannot be blamed on market weakness. Perhaps it’s the entire basic materials sector, of which Synthomer is a part, that is having a bad day? No, some basic materials stocks are up, some are down, it all looks pretty normal there.

What has caused Synthomer to fall 14% today?

According to Reuters, analysts at Morgan Stanley have downgraded Sythomer shares to ‘underweight’ from ‘overweight’. I do not have access to Morgan Stanley’s note accompanying the downgrade. Various sources are reporting that the bank feels supply chain issues will weigh on the company’s ability to ramp up sales, which will weigh on earnings. A bleaker forecasted outlook also made the bank revise its share price target for Synthomer to 400p, which is below the current share price of 418p.

It appears that Morgan Stanley’s analysts have significantly moved the Synthomer stock price. Or, more correctly, investors reacting to today’s analyst downgrade have impacted the share price by selling their shares. Investors are perhaps fearful that Morgan Stanley’s bleaker future will come to pass. They might also be worried about other analysts following suit and issuing their own downgrades on Synthomer stock.

I am not selling my Synthomer shares

I am not rushing to dump Synthomer shares from my Stocks and Shares ISA. There are about 14 brokers covering the stock. Most of the 14 are recommending buying Synthomer. Analysts at Canaccord Genuity reaffirmed their buy rating on Synthomer just a couple of days ago. 

Synthomer is a leading supplier of aqueous polymers. These are bought and used by other companies to make and improve products. As an example, Synthomer’s polymers find their way into latex gloves. Synthomer had a poor 2020, but so did most companies. And things have improved. Synthomer’s trailing 12-month earnings of £217m are currently higher than at any point in the last five years. Its operating margin of 14.5% during the previous 12 months is the best since 2016. All this has happened during challenging times for the global economy. After cutting its dividend during the pandemic, Synthomer has reinstated it. Over the last 12 months, Synthomer has paid 17.3p per share. The trailing dividend yield now is 4.1%. The consensus is that 2022 dividends will be 19.2p, making the forward yield 4.6%. 

Sticking with the consensus

The trouble with reacting to analysts’ reports in isolation is that I would be buying and selling all the time. I would have bought last week and sold today if I behaved like this. Now a series of sell or underweight recommendations and price target cuts will make me think again. But, as of now, this is one analyst note, and the consensus is still overwhelmingly positive.

Perhaps there is something I am missing. Analysts have methods, models, and information sources that are beyond my capabilities. But, the next financial update from the company is not due until next year, when interim numbers are released. For now, that’s what I will be keeping my eye on.

James J. McCombie  owns shares in Synthomer. The Motley Fool UK has recommended Synthomer. 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.