The Tesco (LSE:TSCO) share price has been on an upward trajectory for the past six months. Should I buy Tesco shares for my portfolio at current levels? Let’s take a look.

Supermarket giant

Tesco is the UK’s biggest retailer and makes up one-quarter of the so-called big four supermarkets. The other three are Asda, Morrisons, and Sainsbury. Tesco’s position as the largest provides it with a competitive advantage in my opinion. It also added wholesale business Booker to its portfolio a few years ago.

Tesco shares have been on an upward trajectory since the summer. As I write, shares are trading for 284p. Shares are up 26% from 225p six months ago. Coincidentally, the Tesco share price is up 26% over the past 12 months too. So with this recent rise in share price, should I add the shares to my portfolio?

Should I buy Tesco shares?

To help me make a decision, I have compiled a for and against argument.

FOR: Tesco looks like a bargain at current levels. Based on its current share price, it sports a price-to-earnings growth ratio of just 0.1 The general consensus is that a ratio of under 1 represents a potential bargain. Furthermore, Tesco’s price-to-earnings ratio of just 14 backs up my view. Statista has some excellent information on Tesco and they believe sales growth could rise by over 40% by 2024. If this performance comes to fruition, buying the shares right now could be a master stroke.

AGAINST: Competition in the supermarket sector has always been intense. Tesco has maintained a 25% or above market share against the other three big firms. In addition, German discounters Aldi and Lidl are now making real headway in the UK market. Furthermore, the spate of online-only firms such as Ocado are beginning to gain momentum as well. Growth in sales and increased performance will not be easy to come by.

FOR: Tesco’s market clout as well as size and footprint is one of its competitive advantages. The old adage ‘too big to fail’ springs to mind. Although this does not mean performance can’t suffer, Tesco has a global footprint and has taken steps to streamline operations such as selling its Asian business earlier this year. This will mean it can focus more energy on more lucrative markets such as the UK.

AGAINST: Current macroeconomic pressures such as rising inflation and costs will place pressure on performance and returns. If Tesco can pass rising costs on to customers, it may lose some customers to cheaper competitors. If it decides not to pass on this rising cost, margins will be squeezed. The supply chain crisis as well the shortage of HGV drivers will also affect operations. Right now, there’s no telling how long these problems will last.

My verdict

Right now I would avoid buying Tesco shares for my portfolio. As a savvy investor, uncertainty is a big red flag. The macroeconomic pressures are off-putting, especially as they could affect Tesco’s performance and any returns. In addition to this, competition is getting much more fierce in the supermarket sector with online disruptors as well.

There are aspects of Tesco I like, which I have mentioned above. However, right now I would probably avoid supermarket stocks like Tesco and buy other shares for my portfolio. I will keep a keen eye on developments, however.

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

Warren Buffett famously said, “If you don’t find a way to make money while you sleep, you’ll work till you die”. We all want passive income, and building it is one of the best ways to achieve that financial independence. There are many forms of passive income, like owning rental properties or a business. But dividend investing is my personal favourite. 

Dividends

Dividends are a portion of a company’s profits allocated to its shareholders. These payments can be made once, twice, or even four times a year and are often reflective of how profitable that company has been. Dividend investing is a strategy by which investors build a portfolio of reliable companies that regularly pay a stable dividend, which can then be re-invested into that portfolio. This strategy is very popular in the UK and in recent years we have seen record high dividend yields. Some even going to 13% or 15% of the share’s value!

Average yield

But these high rates are usually unsustainable over the long term. For example, the mining company EVRAZ paid 53p per share in 2019, a whopping 13.39% of the share price. But EVRAZ only paid 42p in 2017 and didn’t pay anything in 2016 or 2015.

The vast majority of UK companies pay a dividend of around 4%. This year, companies like BAE systems and Unilever are expected to allocate 4.22% and 3.39% respectively. It’s worth remembering that no company is under any obligation to increase, maintain, or even pay a dividend. Consistency is everything.

Capital needed

To reach my goal of £300 per month, I will need a total pot of £90,000. Four percent of £90,000 is £3,600. That, divided over 12 months is £300.

While I don’t have anywhere near that money on hand, if I save £250 per month, I would reach that magic number in about 30 years. 

Admittedly 30 years is a long time, but if I start investing that money right away, then the compounding interest will bring that date forwards faster. Now I just need to choose some companies.

Companies

While the goal is to aim for safe companies I can rely on, I do think it’s worth taking a few risks to help speed up the clock. I have spoken at length about how much I like Imperial Brands. The tobacco company has paid a sizeable dividend to its shareholders at least twice a year since 2002. The average yield today is actually 8.9%.

Since my plan uses 4% over 30 years as its benchmark, I’m not worried if Imperial Brands decides to cut down its dividend payment. However, I do think its important I don’t rely on this process and balance out the portfolio with smaller yield companies which I can depend on more consistently.

Lloyds Bank makes a dividend payment of around 2.6% which is beneath my target, but would balance out the risk. Finally, I would choose Unilever as the company is large, profitable, and currently pays a 3.39% dividend.

None of this is a guarantee for the future. Any one of these companies may eventually collapse for some unforeseen reason. All investing bears risks. But without risks one cannot achieve a reward. The important thing is to build a diverse portfolio so that, when retirement comes, I will have a passive income stream I can rely on.

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

Yesterday was a good day for the FTSE 100 index. It rose above 7,300 for the first time in December, after fears of the Omicron virus led to a wobble in the stock markets recently. Clearly then, it appears that investor confidence is returning. And if the index continues to rally through the rest of the month, my earlier prediction that it could conceivably rise to 7,500 by year-end might just happen. 

As optimistic as I would like to be, however, I think it is also prudent to prepare for things to go wrong. There have been plenty of times this year when the stock markets looked like they were close to melting down. We have not seen a full-blown market crash, but there has been more than one day when my portfolio has been completely in the red, thanks to ongoing pandemic-driven challenges. So especially when the going is good, I like to remind myself what to buy if a stock market crash were to happen tomorrow. I do not want to be stuck not knowing what to do when the best stocks around become available at deep discounts. 

JD Sports Fashion: an unstoppable FTSE 100 stock

The first such stock I would buy is JD Sports Fashion (LSE: JD). The FTSE 100 athleisure retailer has shown stellar stock market performance for a while now. And there is a whole new reason to like the stock now. It just did a stock split, so every share of the company became five shares. This means that for the price of one share earlier, I can now buy five shares. As can be imagined, this has resulted in a massive price drop per share.

It is now available for a little over 200p. But the low absolute value should not fool me. It is a solid stock that has seen massive gains over the years. I expect that it would continue to see big gains in the future, which is why I just increased my holdings as well. 

Of course being a retailer, there is always the risk that it could face challenges again if we were to go back into lockdowns. And this would now be at a time that it has made some acquisitions. This could add greater complexity to its situation. But going by its long-term performance, I am fairly confident it could bounce back. 

Croda International: consistently performing

Croda International is another FTSE 100 stock for me to buy. The speciality chemicals’ manufacturer looks prohibitively expensive with a price-to-earnings (P/E) ratio of 55 times. But a look at its long-term share price chart tells me why. The stock has pretty much consistently been rising over the years, so clearly investors are ready to buy it at a premium. And its performance has been strong too. It goes without saying that past performance is no guarantee of future returns, but is nevertheless a strong indicator. 

A market crash could be just the right time for me to buy this high performing stock on dip. 

Manika Premsingh owns shares of JD Sports Fashion. The Motley Fool UK has recommended Croda International. 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.

Penny stocks often experience periods of downturn and volatility. The pandemic has not helped penny stock Hostelworld (HSW), but could it recover over the longer term? Let’s take a look to see if I should buy shares for my portfolio.

Travel stocks suffer

Founded in 1999 by a hostel owner and an IT executive, Hostelworld provides an online affordable distribution channel and property management system for hostels. People can book a hostel in over 179 countries using the platform.

When the pandemic struck, travel and travel-related stocks suffered massively. There was some respite in the summer when the vaccine rollout and easing of restrictions allowed travel and holidays to be booked once more. Since then, the threat of new variants and vaccine issues have caused further woes. Some stocks have not recovered at all and are experiencing a pandemic-related hangover.

As I write, Hostelworld shares are trading for 70p whereas a year ago shares were 14% higher at 82p. In the summer, shares surpassed the penny stock threshold of £1 to trade for 114p. Since that high, shares have been on a downward trajectory. 

For and against investing

FOR: Any bullish stance I have towards Hostelworld stems from pent up demand first and foremost. As an avid traveller myself, I am looking forward to being able to book holidays and travel once more. I am confident many others feel the same. If this does happen, Hostelworld could see performance bounce back from its recent woes and reported losses.

AGAINST: New variants of Covid-19, such as Omicron, travel restrictions, and constantly changing travel rules could hinder any recovery and growth. There is the notion that travel and the market as a whole may not return to normal ever again and that this is the new normal, with peaks and troughs of travel and booking of holidays. As a potential investor, uncertainty is a red flag for me.

FOR: Hostelworld’s half-year report released in August, signified to me that it is in a decent position to keep the lights on for the foreseeable future. A cash position of €33.7m and administrative expenses for the period were €13.5m. This tells me there is enough in the kitty to weather current stormy waters. In addition to this, Hostelworld does not have many assets it needs to continue to pay for and maintain. With few assets, profit margins will be high if revenue does begin to come in once more.

AGAINST: Despite what looks like a decent balance sheet, sustained losses and a lack of consistent performance across the past couple of years puts me off. Any firm that is loss-making does raise a red flag for me. This is the case with Hostelworld.

Penny stock to avoid

Overall I am sitting on the fence with Hostelworld shares for my portfolio. I can see long-term recovery potential with pent up demand to play a part and a decent balance sheet to help, but the current issues it faces are too big to ignore.

If I had to make a decision right now? I would avoid buying shares for my portfolio. If the travel and tourism sector picked up based on Covid-19 issues easing, I would revisit investing if shares were trading at similar levels.

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.

The Rolls-Royce (LSE: RR) share price currently rests at 128p, a 10% decrease from the 142p it sat at in early November. This is due to the rising investor fears of the emerging Omicron variant. However, the company’s FY21’s half-year results highlight a focus on financial restoration, evidenced by a large cash flow generation. This explains the 32% rise in share price in September alone.

A look at Rolls-Royce’s considerable increase in liquidity and research development suggests further potential for this stock. I am now encouraged to consider this past month’s price decrease as a buying opportunity. But with a trading update due December 9, how high can the Rolls-Royce share price go?

Operational risk 

The company has been continuously challenged by the pandemic’s headwinds on operational construction and cut back on product demand. Rolls-Royce’s annual report for FY20 highlights the company’s struggles with the pandemic, reporting a decrease in underlying revenue from £16,875m to £11,824m across the year. This resulted from the negative impacts on airline demand from coronavirus restrictions.

The Omicron variant suggests further problems ahead. Yet such problems are market-wide, with the FTSE 100 index dropping 4% in late November. This explains the similar price drop in the Rolls-Royce share price. But a focus on its long-term development shows this company to be very well equipped to tackle this new coronavirus variant.

Managerial development

Extensive financial development is a promising feature for this aerospace company. Despite revenue losses, recent targeting of research and other revenue streams has met managerial aims for financial restoration.

A look at the half-year report shows underlying revenue to have only decreased from £5,410m in H1-2020 to £5,227m in H1-2021. Indeed, the company has significantly dropped the revenue decrease suffered during 2019-20. Rolls-Royce has also shifted its focus onto more stable and prospective areas. For example, an increase of £43m in research and development costs suggests the company is adjusting aims toward future expanse. A 4% rise in Defence revenue highlights the ongoing restructuring designed to counteract the impacts of the virus on the aerospace market. 

Would I buy Rolls-Royce shares?

A commitment to operational reduction and equity increase has certainly contributed to the value of  Rolls-Royce stock. As seen in the half-year report, an 8,000 (of a target 9,000) role reduction has been achieved. This has contributed to the £0.9bn decrease in net debt. Additionally, the £1.7bn increase in free cash outflow has placed the company’s overall liquidity in a strong position. Rolls-Royce’s price-to-earnings ratio is now around 15. This suggests the company may be undervalued, particularly if profits continue to recover.

Rolls-Royce’s revenue and operation has suffered throughout the past year. However, the success of recent financial management has established a concise direction out of this prolonged pandemic. This leads me to have high hopes for the trading update due December 9. Overall, I consider this past month’s dip in share price a great buying opportunity for my investment portfolio.

Hamish Cassidy 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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In early trading today, the FTSE 100 index touched 7,400 before falling slightly. This is an encouraging sign that today’s trading has carried forward yesterday’s momentum. It is particularly heartening after seeing the investor nervousness caused by the Omicron variant over the past few days. Despite the recent dips though, the index and the stock markets have made progress over the year. 

Not too weak or too strong

If I were to start investing today, this would be a good place for me to begin. The stock markets are not so weak as to be completely demoralising for me just when I start investing. And they have not moved up so high that there is little upside left. In fact, I think the FTSE 100 index could do quite well even next year as long as the recovery gets stronger. 

Investing for capital gains…

This environment could be quite good for growth stocks, which can earn me big capital gains over time. I would particularly look at buying cyclical stocks like FTSE 100 banks and oil giants. These stocks have made a lot of progress in the past year, but they are still trading below their pre-pandemic levels. I reckon that they could stand to gain the most in 2022. 

…and for dividends

Another reason I like banks and oil stocks is their potential for dividends. They have all started paying dividends again, but their dividend yields are still much lower than many other FTSE 100 stocks. I am hopeful that these can increase over the next year, though. Oil companies are expected to continue turning in strong results as crude oil prices remain elevated. This could lead to higher dividends. 

Similarly, banks are now free to set their own dividends. Until recently, they were required by regulators to limited their dividends, to ensure stability in the financial system and the economy. So, they too, could pay bigger dividends in the future. 

Good passive investing buys for me

I would, however, also look at other dividend stocks that could earn me a steady stream of passive income over the years. Stocks like utilities are a good place to start, because they have paid dividends consistently over the years. And their dividend yields right now are higher than the FTSE 100 average, which is 3.6%. 

But I would also consider stocks that might have low dividend yields at present, but that have managed to grow their dividends fast over the years. These could turn out to be the best dividend stocks for me to buy over a long enough holding period. This is because the yield on my initial investment can become quite big over time. 

The risks and takeaway

There is always a chance though, that 2022 might not turn out to be a good year for the stock markets. The Omicron variant could derail the recovery and even send us back into lockdowns. But I am quite optimistic that it can be brought under control. The cases are limited in both numbers and severity so far. I think the opportunities for me to make gains from stock market investing are far bigger than the risks 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.

I believe FTSE 100 incumbent B&M European Value Retail (LSE:BME) is one of the best stocks to buy now. Should I add shares to my portfolio at current levels?

Retail giant

Best known as B&M, the discount retailer has become a household name in recent years. It serves over four million customers each week through its 685+ locations supported by 35,000 staff.

I must admit there aren’t many retail stocks on my best stocks to buy now list. Retail stocks have not had the best time in recent years due to changing habits of consumers and competition in the marketplace. But B&M has bucked the trend to go from strength to strength. Discount retailers have risen in popularity as people look to make their hard-earned cash go further. I believe the pandemic exacerbated this. 

As I write, B&M shares are trading at 641p, whereas a year ago, the shares were trading for 479p, which is a 33% return over 12 months. The shares have easily beaten pre-pandemic levels and are trading at all-time highs.

Why I like B&M

B&M has performed consistently in the past and more recently. I understand past performance isn’t a guarantee of future performance, however I use it as a gauge. I can see that revenue and gross profit has increased year-on-year for four years. Coming up to date, interim results released in November for the 26 weeks to 25 September were promising. Group revenue increased 1.2% compared to the same period last year. And group profit before tax increased by 2.4%. An interim dividend of 5p per share was declared. This was up 16.3% from last year’s interim dividend. Net debt also decreased. 

The stocks I see at the best picks to buy now are attractively priced and would provide me with a passive income. B&M ticks both these boxes. At current levels, it has a price-to-earnings ratio of just 14. And the dividend yield stands at just over 2%, which lags the FTSE 100 average of 3%. But if I bought now and the share price growth continued, that would improve.

And I hope it would continue to grow with B&M currently growing at a fast rate. This is primarily through opening new stores throughout the UK and through its other brand Heron Foods, as well as its French subsidiary. This was highlighted by 14 new B&M stores opening in the UK alone in the interim period mentioned. B&M has set itself a target of having 950 store locations in the UK ,although no specific time frame has been put on this target.

Strong stocks have risks too

B&M is facing current macroeconomic issues including rising inflation and rising costs. These costs could be passed on to customers, but this could affect customer numbers and performance. If the costs aren’t passed on to customers, profit margins will be squeezed. Both of these aspects could affect investor returns and sentiment. In addition to this, supply chain issues and a shortage of HGV drivers in the UK could affect store operations and, in turn, performance overall.

Right now I think B&M is one of the best FTSE 100 stocks on the index. It has a good track record of performance, pays a dividend to make me a passive income and continues to grow. When looking for the best stocks to buy now for my portfolio, I look for all these traits. I would happily add B&M shares to my holdings right now.

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

As an owner of housebuilder shares I find the steady stream of news coming from the homes market very exciting. Halifax claimed on Tuesday that property prices in the UK leapt at their fastest rate since 2006 in the three months to November. It’s perhaps no surprise then that builders like The Berkeley Group (LSE: BKG) have been busy hiking their earnings predictions recently.

In fact, that Halifax report suggests that Berkeley — which specialises in building homes in London and the South East — could be a particularly attractive housebuilder to buy. It showed that price growth of apartments is outpacing that of houses right now. Between September and November the average flat price jumped 10.8% year-on-year, while the average detached property gained 6.6% in value.

This bodes well for developers like Berkeley that build apartment blocks in the congested capital city. In fact, the FTSE 100 housebuilder’s latest financials illustrate how strong the London market is today.

Profit forecasts hiked again

Berkeley said on Wednesday that revenues leapt 36.3% in the six months to October. They clocked in at £1.22bn versus £896m in the same 2020 period. This in turn propelled pre-tax profit to £291m, up 26% year-on-year from £231m reported previously.

Berkeley said it’s benefiting from “a resilient sales market” and from its decision to concentrate on London and the South East, regions it describes as “the country’s most under-supplied housing markets”. The FTSE 100 firm also lauded the earnings visibility that its portfolio of 64 ‘live’ building projects provides.

As a consequence, Berkeley lifted its profits predictions once again. It reckons earnings for the financial year to April 2021 will now beat its earlier forecast by 5%. Berkeley added that it expects pre-tax profits to grow 5% each year over the following three financial years. This will be delivered by the company increasing build rates by 50% versus pre-pandemic levels, it said.

BIG FTSE 100 dividend yields!

Berkeley’s share price has risen 4.5% in midweek trade following the release. Broker commentary around the results has matched the upbeat reception from investors too.

Steve Clayton, manager of the HL Select UK Growth Shares fund, pointed  out that Berkeley is “sounding confident” and noted that the business is stepping up its land-buying efforts accordingly. He noted that “historic investment into land acquisition, at times when others have been wary or unable to commit, has left the group with a clear growth runway ahead… built around the predictable delivery of future developments at attractive margins”.

I share the Hargreaves Lansdown man’s positive take on today’s news. Though I’m also wary that businesses like Berkeley face considerable margin headwinds as building product and labour shortages push up costs.

All things considered, I think Berkeley is a highly attractive buy. And especially as additional earnings upgrades could be around the corner. Today the builder trades on an undemanding forward P/E ratio just below 13 times. It also sports a mighty 5.5% dividend yield at today’s price around £48.40. I’d buy this FTSE 100 stock today and look to hold it for years.

Royston Wild owns shares of Barratt Developments. The Motley Fool UK has recommended Hargreaves Lansdown. 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 Centrica (LSE: CNA) share price has risen by more than 40% so far this year. The owner of British Gas is finally starting to win back investor confidence.

Centrica shares are still more than 65% lower than they were five years ago. But I think there are good reasons to be confident about the outlook for the business over the next few years. I’ve been taking a fresh look at Centrica to see where I think the stock could be in five years’ time.

British Gas is set for growth

Chief executive Chris O’Shea took charge of a business with too much debt and too many moving parts. These problems have now largely been fixed, with the sale of the Direct Energy business in the US and the company’s North Sea oil fields.

The main part of the business remaining is British Gas, which has a strong focus on UK consumers. The last few years have been tough for the UK’s largest energy supplier, as it’s been undercut by smaller rivals offering cheap fixed price deals.

However, the failure of more than 20 of these rival suppliers over the last year has changed the picture. British Gas has picked up more than 400,000 new customers from failed firms. I think its prices will be more realistic and competitive in the future, as unsustainably cheap deals have been removed from the market.

Alongside this, I expect British Gas to increase sales of services such as boiler replacement, air source heat pumps, home emergency cover and smart security products. These services are generally more profitable than selling electricity and gas, so they should help to lift Centrica’s profits.

Centrica share price: where next?

Centrica shares traded at over 200p five years ago. But Mr O’Shea’s changes have left the group a smaller business than it was. Some problems remain too — not least the company’s £1.5bn pension deficit, which will require £175m in annual payments from 2021 to 2025.

What might Centrica shares be worth in five years’ time?

Broker forecasts suggest that the group’s free cash flow — a surplus cash produced each year — could rise to around £700m over the next couple of years. My guess is that progress might slow after this, but if Mr O’Shea’s plans are successful, I reckon a figure of £750m looks reasonable by 2025.

The last time Centrica produced this much free cash was in 2018. At this time, the share price was around 150p. I think that’s a reasonable estimate today.

However, one risk I’d flag up is that the company’s reduced dividend could hold back progress. Back in 2018, dividend cover had fallen to just one times earnings. This resulted in a tempting 7%+ dividend yield.

Mr O’Shea is expected to keep dividend cover at around two times earnings. This is a sensible move, in my view, but it means that payouts will be smaller, even if profits return to historic levels.

As a result, the dividend yield is likely to be much lower. This might deter some investors, but even so, I think Centrica shares could do well over the next five years. I’d certainly consider buying the shares for my portfolio at current levels.

Roland Head 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.