If I had £500 to invest in UK shares, I’d be tempted to act right now. I think there’s value in the market today. Here’s what I would do.
Investment objectives and risk
My first move would be to consider what level of risk I could tolerate.
If the £500 was all the money I had to invest right now, I’d be sure to diversify with it. I’d do that by going for two companies in different sectors. I’d also focus on companies with a strong business track record. Why would I choose long-established companies with proven business models? Past performance isn’t an indicator of future results, but I would feel more comfortable having a history to help me judge such companies’ possible future prospects.
UK shares with global exposure
My first pick, with £250, would be Unilever (LSE: ULVR).
The company name is familiar to many people. But even if I didn’t know the name, I’m familiar with its brands that include Marmite, Dove and Ben & Jerry’s. The company manufactures and sells a wide range of products. Its portfolio of brands allows it to differentiate itself from generic competitors. That can help it achieve pricing power. I think that’s good for profits, which last year came in at almost €8bn before tax.
Profits like that enable the company to pay out dividends The current yield is 3.5%, which I find attractive. But I would consider investing in these UK shares today not just for the income potential. Rather, I’m attracted to Unilever’s global exposure and focus on fast-moving consumer goods. From shampoo to laundry detergent, I regard many of its products as resilient even in the face of shifting customer preferences. There should be demand far into the future.
Against that, the shares have fallen 2% over the past year. Risks include the rise of more nimble, smaller competitors. Another risk is higher input costs of raw materials. If the company can’t pass those on to customers, profits could fall.
High-yield UK shares
For the second half of my £500, I would open a position in British American Tobacco (LSE: BATS).
A key risk to tobacco companies is a long-term decline in the cigarette market and anti-smoking regulation. That applies to BATS as well as its competitors. But I think the tobacco giant’s exposure to developing markets could help mitigate this. Additionally, it has been growing its business in non-cigarette product lines. In a trading update this week, it announced that it added 1.4m non-combustible customers in the first quarter. Its Vuse brand is approaching global leadership in vaping.
The company expects mid-single-digit adjusted diluted earnings per share growth, at constant currency. That’s positive, showing that it’s able to keep growing its business. But it also reveals another risk with BATS: currency fluctuations. With reporting in sterling but sales mostly overseas, the company is exposed to currency risks. Adjusted diluted earnings per share growth is forecast to be reduced around 8% due to such a currency “translation headwind”.
Nonetheless, with its 7.5% yield and proven ability to fin growth in a mature industry, I would consider spending £250 on these UK shares for my portfolio today.