If I told you that you could invest £5,000 or £10,000 in a single share, sit back, relax and cream off a 6.5% yield for years to come, would you take it? Most investors probably would.
With a new decade fast approaching, I’d say now is the perfect time to break down your portfolio performance and see how you can make yourself richer in 2020 and beyond.
And if you’ve had your capital drained by an underperforming share, this is the point to reassess to return your Stocks and Shares ISA or SIPP back to profit.
When 13% yields go bad
It’s easy to get distracted by double-digit headline rates. We’ve all done it. You take your eye off the ball and pile into some awful rubbish that has no chance of ever making you any money.
At first glance a 13% dividend yield should equal celebration time for Micro Focus International (LSE:MCRO) shareholders.
But investors are right to be worried that the company always comes with a “struggling” or “troubled” tagline. The thing that’s chiefly concerning about the British IT and software seller is that it has amassed a gargantuan $4.3bn of net debt, three times more than its adjusted earnings for the year.
October saw the MCRO share price plummet when CEO Stephen Murdoch admitted: “Weak sales execution” was made worse by “a deteriorating macro environment resulting in more conservatism and longer decision-making cycles.“
Highly leveraged businesses aren’t automatically set for failure, but when growth is slowing and sales are soft, then large chunks of debt will put extreme pressure on profits. Now a 13% dividend yield is no longer a boon and more an unaffordable cause for concern.
And I see the ongoing structural costs of a problematic 2017 merger with Hewlett Packard‘s software business continuing far into 2020.
Get richer with 6.5%
There are certain shares that I believe every serious UK investor should own. This is a FTSE 100 company that no-one can deny is making money hand over fist and is one that I think will carry on enriching investors far into the next decade.
The Royal Dutch Shell ‘B’ (LSE:RDSB) share price has barely moved in the last 10 years: it’s just 3.1% higher than it was in December 2009. But this low volatility is actually something that I believe will make you richer with a long-term hold.
Between 2017 and 2018 Shell nearly doubled its operating profits from $19bn to $35bn, with revenues rising from $305bn to $388bn.
Shell should occupy pride of place in your portfolio for one good reason: you can take your 6.5% yields year after year, safe in the knowledge that the business is so competently run that it won’t cause you any heartache. The yield for next year is forecast at 6.8%.
As a snapshot of the company’s health, Q3 2019’s results are as good as any, showing strong cash generation, $10.1bn in free cash flow, a pretty conservative gearing of 27.9%, with “very strong earnings and optimisation results” producing $4.8bn across the quarter.
In my opinion, the only consideration is the best price you can get your Shell shares at. The current P/E ratio is 10.4, forecast to increase slightly to 12.3 next year, so now is as good a time as any.
- The State Pension could have you working until 67. Here’s what I’d do to retire early
- The Tullow Oil share price has crashed 55% today. Here's what I'd do now
- Forget the top Cash ISA rate. I'd pocket 7.8% here
- This is how much £1K invested in BT shares 5 years ago would be worth now. Ouch!
- The Lloyds share price is rising - should you buy it and these election winners?
- Top shares for 2020
Tom currently has no position in the shares mentioned. The Motley Fool UK has recommended Micro Focus. 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.
Motley Fool UK 2019