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Why I’m avoiding the Reddit trader frenzy and buying this top UK stock instead

Harvey Jones
·3-min read
Serious puzzled businessman looking at laptop
Serious puzzled businessman looking at laptop

Anybody who wants to make a fast buck and stick two fingers up at Wall Street, will be keen to enlist as a Reddit trader. This is a thrilling, revolutionary moment for many private investors, who are taking down hedge funds that have been ‘shorting’ stricken companies in the pandemic.

Traders on Reddit and other social media platforms have been piling into the stocks of troubled companies, notably US video game retailer GameStop, and driving them to insane highs. Some have made fortunes along the way. Others will lose fortunes as the GameStop share price crashes back down.

This isn’t how I plan to build my long-term wealth. I still believe the best way to do this is slowly and surely, by investing in top UK stocks for dividends and growth.

I’d buy this FTSE 100 income stock instead

There’s no Reddit trader frenzy around the Legal & General Group (LSE: LGEN) share price right now. I think there never will be. The FTSE 100-listed insurance company shouldn’t see its stock rise by thousands of per cent in my lifetime. Let alone in months, as GameStop has. Over five years, L&G shares have increased by just over 7%. They’re down 18% over the last year, thanks largely to the pandemic, but have been picking up in recent months in what I hope is the start of a long-term, post-pandemic recovery.

So why would I buy it? Legal & General is a British blue-chip company that generates most of its revenues by selling low-cost tracker funds, pensions, annuities, life assurance and equity release lifetime mortgages.

Yep, boring. Certainly compared to being a Reddit trader.

Even a solid, boring business like L&G comes with risks. It has been hit by falling stock markets and rock bottom interest rates. The company’s latest six-month report showed operating profits down 6% to £946m. These headwinds are not going to suddenly disappear. Stock markets are in retreat as I write this, while interest rates look set to remain low for several years.

Despite this, I’m shunning all dreams of becoming a super-rich Reddit trader and buying L&G instead. Why this company? First, I don’t pick stocks for how they perform over the next year, but the next 10 years. Over such a timescale, I’m hoping that the Legal & General share price will have much further to climb, as profits rebound and are either reinvested back into the company or distributed among shareholders.

Reddit trading frenzy isn’t for me

Second, today’s entry price is highly tempting to me, at just 8.22 times earnings. The FTSE 100 as a whole trades at more than 18 times earnings.

The other big attraction is the dividend. Currently, L&G yields 7%, covered 1.6 times by earnings. I can take this free of tax inside a Stocks and Shares ISA. This is underpinned by a £7.3bn capital surplus and a £3.5bn credit default reserve. Better still, management has maintained shareholder payouts despite the pandemic.

No dividend is guaranteed. Management looks set to hold this year’s dividend at last year’s level. However, I think Legal & General should offer an attractive income stream for years, even if it dips from today’s highs. I’m interested to see whether the Reddit trader army will last as long.

The post Why I’m avoiding the Reddit trader frenzy and buying this top UK stock instead appeared first on The Motley Fool UK.

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Harvey Jones 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.

Motley Fool UK 2021