How much risk should you take when building up a stock portfolio to help fund your retirement? The answer depends on your circumstances and your age, in my opinion — there’s no one right answer.
In this article, I’ve taken a look at three stocks that cover the spectrum of risk, from fairly safe through to quite risky.
Unsurprisingly, the safest firm also has the lowest dividend yield — but I think all three could be worth a closer look.
Shopping at Sainsbury
I believe J Sainsbury (LSE: SBRY) is the pick of the UK supermarkets — and perhaps the only one really worth buying at the moment. The shares seem good value to me on every measure:
|
Ratio |
Value |
|
2016 forecast P/E |
11.2 |
|
Price/book ratio |
0.8 |
|
Forecast dividend yield |
4.4% |
Sainsbury continues to have much lower debt levels than the other big supermarkets and has avoided the earnings collapse seen elsewhere.
The group’s only weakness is that continued investment in new stores means that Sainsbury has not generated much free cash flow for a number of years.
I’d like to see some evidence that this business can generate surplus cash to fund its dividend. Despite this, I think it’s an attractive long-term income option at the current price.
Should you hold GVC?
GVC Holdings (LSE: GVC) is something of a marmite stock. On the one hand it generates a lot of cash, pays generous dividends and offers an amazing cash-backed 11% forecast yield.
On the other hand, GVC is an offshore company which operates in the online sports betting and gaming sectors. Earnings at such companies are generally considered to be riskier than at many businesses, due to the risks of regulatory disruption and other potential issues.
I’m not going to try and guess whether GVC has a bright long-term future, but I can say that the firm appears to be trading well at the moment. According to a trading update published this morning, net gaming revenue was 11.7% higher in October and November than during the same period last year. GVC made more money from each bet too, as the firm’s gross win margin was 9.3%, up from 8.7% at this point last year.
However, GVC’s real opportunity to shine — or flop — will come if its proposed acquisition of Bwin.Party Digital Entertainment is successful. This would double GVC’s revenues and could result in a big hike in profits.
In my view, GVC shares are a too risky for retirement, but have the potential to be a profitable buy.
Play safe with Unilever
With UK brands including Flora, Hellman’s and Cif, consumer goods giant Unilever (LSE: ULVR) needs no introduction.
Unilever’s global footprint and huge brand portfolio give the firm a very strong and stable level of sales, along with decent profit margins. The shares are up by around 5% this year, compared to a 5% drop for the FTSE 100, but still offer a reasonable forecast dividend yield of 3.2%.
Although Unilever does have a forecast P/E of around 20, which is quite pricey, the firm’s dividend has consistently been backed by free cash flow, making it a high quality payout. Unilever’s 16% operating margin is also attractive.
To help reduce the risk of paying too much for Unilever’s highly-rated shares, I tend to add a little more to my portfolio each time the share take one of their periodic dips.