One way I believe I can do this is by looking at trusts that invest in a number of different businesses. One I’m currently considering is 3i Group (LSE:III). Should I buy or avoid the shares?

Venture capitalists

As a quick introduction, 3i is one of the biggest investors in private companies in the UK. Its strategy is to get in early with growth companies and it has a long track record in investing in and helping grow tech firms.

So what’s happening with 3i shares currently? Well, as I write, they’re trading for 1,245p. At this time last year, the stock was trading for 1,272p, which is a 2% drop over a 12-month period. More tellingly for me, however, is the fact that 3i shares have returned 11% since the stock market dip of March, from 1,113p to current levels.

The best stocks to buy have risks too

One of the biggest issues facing 3i Group is that of macroeconomic headwinds. These include soaring inflation, the rising cost of materials, and the global supply chain crisis. A lot of businesses in 3i’s portfolio are consumer goods businesses. This means most are at the mercy of these headwinds. 3i could see profitability and operations negatively affected by cost pressures and supply chain issues.

One risk I always associate with investment trust stocks such as 3i, is over-diversification. Access to a multitude of businesses in a number of sectors isn’t always a good thing. Different businesses and markets perform differently and this can have a negative impact on returns and growth sometimes. This can especially be the case during times of economic volatility like now. I will keep an eye on 3i’s portfolio and performance closely to monitor this.

The bull case and what I’m doing now

So to the positives then. I often refer to a stock’s performance to gauge investment viability, although I do understand that past performance is not a guarantee of the future. Looking closely at 3i, I can see it has a consistent track record. Performance was affected by the pandemic period, but revenue growth returned the following year.

Next, 3i shares would boost my passive income stream through dividend payments, as many of my other best stocks to buy do. At current levels, the shares’ dividend yield stands at close to 4%. This is broadly in line with the FTSE 100 average of 3%-4%. I do understand that dividends are never guaranteed and can be cancelled at any time, however.

Finally, at current levels, 3i shares look dirt-cheap to me on a price-to-earnings ratio of just three. The FTSE 100 average is close to 15 and the general consensus is that a ratio below this indicates value for money.

In conclusion, I believe 3i Group could be one of the best stocks for me to buy for my aims of growth and increasing returns. The shares look good value for money, the business has a good track record of performance, and there’s a dividend currently too. I would add the shares to my holdings.

The good news for long-term investors like myself is that this share price weakness has pushed dividend yields up. With that in mind, here’s a look at three top dividend shares I’d buy now, before the market recovers.

Unilever

One of my top picks for dividends right now is Unilever (LSE: ULVR). It’s a consumer goods company that owns many well-known brands. The stock is currently sporting a prospective yield of around 3.8%, which is attractive in today’s low-interest-rate environment.

What appeals to me about Unilever is that it’s a ‘defensive’ company. Unlike ‘cyclical’ companies, which are impacted significantly by economic conditions, Unilever tends to see fairly stable demand for its products (soaps, deodorants, cleaning products, etc) throughout the economic cycle. This is a valuable attribute right now, as we could be heading into a recession.

Meanwhile, thanks to its strong brands, the company has pricing power. This should help it offset the negative effects of inflation.

Of course, Unilever could still be impacted by a significant economic slowdown. We may see consumers turn to cheaper, own-brand products.

All things considered, however, I think this is a solid dividend stock for my portfolio right now.

Diageo

I also like the look of Diageo (LSE: DGE) at the moment. It’s one of the world’s leading alcoholic beverages companies. The yield here is currently about 2.2%.

Like Unilever, Diageo has defensive qualities. When economic conditions are strong, people drink alcohol. And when economic conditions are weak, they drink alcohol (often to drown their sorrows!). This means Diageo is a sleep-well-at-night stock.

Diageo also has a very attractive long-term growth story though. Over the next decade, we are going to see millions more consumers in the world’s emerging markets (where the company generates a lot of its sales) who can afford its beverages. This should propel revenues, earnings, and dividends higher.

Diageo is not the cheapest dividend stock around. Currently, the forward-looking P/E ratio here is about 22. This adds a little risk.

I’m comfortable with the valuation however, given the company’s defensive attributes and long-term growth potential.

3i Group

Finally, I also see 3i Group (LSE: III) as a good dividend stock to buy for my portfolio. It’s a leading private equity and infrastructure investment firm. The prospective yield here is about 4.3%.

One reason I like 3i right now is one of its largest private equity division investments is Action – a leading European discount retailer. This could have a lot of potential in the current economic environment, where consumers are looking to cut costs. In a recent update, 3i advised Action had achieved “very strong sales growth” in the year to date.

Another reason is that the company offers exposure to infrastructure. Generally speaking, infrastructure assets tend to offer protection against inflation. Often, they have contracts that are linked to it.

It’s worth pointing out that this dividend stock can be volatile at times. This is a risk to be aware of. However, with the stock currently trading at just six times this year’s earnings estimate, I think it’s worth the risk.

Scottish Mortgage Investment Trust (LSE: SMT) and 3i Group (LSE: III) are long-standing Footsie constituents. They were joined by Pershing Square Holdings (LSE: PSH) two years ago following its promotion from the FTSE 250. Let’s examine each in turn.

Scottish Mortgage Investment Trust

The Scottish Mortgage share price has risen 150% over five years, despite a substantial recent drawdown. The investment trust offers shareholders exposure to US growth stocks, Chinese shares and unlisted equities.

Scottish Mortgage has a significant concentration in biotech stocks. Leading mRNA technology pioneer Moderna and DNA-sequencing outfit Illumina feature in its top three holdings. They’ve helped Scottish Mortgage deliver stunning returns recently, but both stocks have fallen around 50% in 2022.

Scottish Mortgage shares have a high risk/reward profile. Deputy Manager Lawrence Burns recently stated “genuine long-term investing requires not just patience but the ability to endure periods of intense discomfort. We have experienced such discomfort often with our holdings.”

Taking Moderna as an example, mRNA technology has potential applications beyond Covid-19 vaccines to a range of healthcare issues from influenza to cancer. I believe it would be short-sighted to ignore Scottish Mortgage’s future growth prospects based solely on recent share price declines in its holdings.

3i Group

Venture capital group 3i has a particular focus on private equity and infrastructure in North America and Northern Europe. With a low price-to-earnings ratio of 2.69 and a dividend yield of 4.18%, 3i stock looks to me like an attractive value investment prospect at present.

Barclays recently issued a target of 1,840p for the 3i share price — considerably above today’s price of 1,112p. The investment trust’s most recent results give credibility to this bullish forecast. Total revenue for the last financial year increased by 44%. Furthermore, 3i hiked its dividends by 30%.

I see room for further growth, but 3i shares aren’t immune to challenges posed by soaring inflation. Consumer goods stocks make up a large portion of its portfolio. These companies are particularly susceptible to fluctuations in household spending.

Pershing Square Holdings

Bill Ackman’s investment trust is notable for its unique activist investment approach. Pershing focuses on large-capitalisation North American companies with strong potential that often have financial difficulties.

Pershing’s cumulative return of 234% since its inception in 2012 looks impressive at first glance. However, it trails the S&P 500‘s 278% return over the same period.

Ackman is undeniably a successful investor. After all, his net worth totals $2.8bn. However, recent blunders — including an ill-fated foray into Netflix shares — show even the most prescient investors make mistakes. Pershing liquidated its $1.1bn stake in April for a $400m loss.

Which FTSE 100 investment trust would I choose?

Each investment trust adopts a different investment philosophy, giving shareholders exposure to different corners of the stock market.

Currently, I think 3i is the best fit for my portfolio. After recently leapfrogging Scottish Mortgage to become the UK’s largest investment trust, it’s the first one I’d invest in.

3i share price has doubled in 5 years

Five years ago, the stock was trading at a price of around 700p. Cut to today, and it has almost doubled to 1,354p as I write this Friday afternoon, almost double of where it was then. And this is after it saw a fall late in February. If that stock market wobble had not happened, it could have stayed at more than double that level. 

But just because the investment company has done well in the past, does not mean that it can continue to do so. To figure out if it has the potential to, however, I took a look at its recent numbers. Most recently, the company provided a portfolio update, which showed some healthy developments. 

Recent developments are encouraging for the FTSE 100 stock

First, its investment in Action appears to be doing well. Action is a European non-food discount retail chain, which saw a robust 23% sales increase in 2021 compared to the year before. Its earnings, as measured by the number before interest, taxes, depreciation and amortisation, showed even higher growth of 36%. Considering that it is 3i’s single biggest investment, the rise is encouraging. 

Next, in general, its private equity portfolio has shown good results. A review of its portfolio companies reveals “strong momentum”. This is attributed to post-pandemic improvements and quite likely driven to an appreciable extent by Action’s performance. 

Finally, it talks about a non-negative in the context of Russia and Ukraine, as it has no exposure to either country. I do think, however, that it will still feel the indirect heat from the war because of its implications for inflation. 

Risks if I invest £1,000 in it

The countries are produce commodities, whose prices were rising anyway. In the UK, inflation in February reached a high of 6.2%, which is far in excess of the Bank of England’s target rate of 2%. And we can brace for higher prices now. The Office of Budget Responsibility now expects inflation to touch 8.7% by the last quarter of the year. In fact, 3i itself mentions that “inflation and supply chain issues will be the focus this year”. This is because its portfolio companies are looking to address the challenge. 

Still, it is possible that it will be impacted less than, say, a company that directly has to bear the squeeze from higher costs and lower consumer demand because real incomes start falling. And its latest report gives me reason to feel encouraged that its share price performance can be sustained. Analysts’ share price targets look encouraging too. I am pretty positive I want to invest £1,000 in the stock.

While there’s no guarantee value will continue to outperform growth, I like the idea of owning a few cheap stocks to capitalise on the rotation into the former. With that in mind, here’s a look at two UK value stocks I’d be happy to take small positions in today.

A dirt-cheap FTSE 100 stock

Let’s start with private equity and infrastructure investment firm 3i Group (LSE: III), which is a member of the FTSE 100 index. This stock looks very cheap right now. Currently, its forward-looking price-to-earnings (P/E) ratio is just 5.9.

I’m bullish on this value stock for a couple of reasons. Firstly, the company appears to have plenty of momentum right now. In a recent performance update, the group said it generated a total return of 33% from portfolios in the nine months to 31 December 2021. It also said it’s set for a “strong close” to its financial year ending 31 March 2022.

Secondly, in the second half of 2021, there were some big insider buys here from top-level executives within the company. Insiders only buy company stock for one reason – they expect it go up.

One risk to consider here is that revenues and profits can fluctuate. This can result in share price weakness at times.

Overall however, I think the risk/reward is attractive right now. The stock is cheap and there’s a dividend yield of around 3% on offer.

It’s worth noting that analysts at Barclays just raised their target price to 1,840p, which is nearly 40% above the current share price.

A value stock offering growth and dividends

Another UK value stock I’d snap up today is Hikma Pharmaceuticals (LSE: HIK). It’s an under-the-radar healthcare company that manufactures generic, branded, and injectable medicines. At present, the stock has a forward-looking P/E ratio of about 12.2, which is well below market average.

There’s a lot to like about Hikma, in my view. For starters, the company has a solid growth track record. Between 2015 and 2020, revenue climbed from $1.4bn to $2.3bn. For 2021, analysts expect revenue of $2.5bn.

Secondly, the company is very profitable (three-year average return on capital of 18%) and it has been growing its dividend at a very healthy rate in recent years. For 2021, analysts expect a payout of 53.5 cents per share, which equates to a yield of around 2% at the current share price.

A risk to consider is acquisitions. Hikma has made a number of them in the past and they haven’t always gone to plan. This could happen again.

I’m comfortable buying the stock at current levels however, as I think the low valuation provides a margin of safety.

And I’ll point out I’m not the only one who is bullish here. Last month, analysts at Peel Hunt upgraded the stock from ‘hold’ to ‘buy’, saying the generic medicine maker’s business and prospects are “under-appreciated” at its current share price.

There are many factors we need to consider before investing in a company, including the general economic environment.

Challenges for UK shares 

For example, right now, inflationary pressures are building around the world. These are pushing up the cost of goods for companies and they may not be able to pass these higher charges onto consumers. If they cannot, they will have to absorb the rising costs in their bottom line. 

Inflationary pressures are also forcing central banks to start increasing interest rates. This will increase the cost of debt for many corporations and could be another factor that influences profit margins in the years ahead. 

Considering these challenges, I am looking for UK shares that exhibit two key qualities. They must have large profit margins with the potential to absorb rising costs. And they also need strong balance sheets so rising interest rates will not present too much of a headwind. 

FTSE 100 consumer champion 

A company that currently exhibits both of these qualities is Reckitt (LSE: RKT). The global consumer goods group owns a stable of brands in the hygiene and health sectors. Individually, these brands are strong businesses, but they are even stronger when combined. 

The brand strength of these products also enables the business to charge above-market prices. Ultimately, this helps the business generate fatter profit margins.

But margins have collapsed in the past two years as the company has announced large write-offs. However, in the four years between 2015 and 2018, it produced an average operating profit margin of 25%. 

On top of this positive quality, the group also has a robust balance sheet with the potential to absorb higher interest rates. 

Investing for growth 

These qualities do not make the business immune from the risks outlined above, but they do provide a level of protection. Profits could come under pressure from rising costs in the years ahead, and this is something I will be factoring into my projections. 

Even after taking this headwind into account, I believe Reckitt is one of the best UK shares to buy now for my portfolio. Management has outlined plans to spend more than £1bn a year over the next few years developing new products. This initiative will help contribute to growth and is another reason why I think the enterprise will outperform over the next couple of years. 

Historically, infrastructure assets have outperformed during periods of rising prices and inflation. These assets are perfectly suited to an inflationary environment. While they may cost a lot to build, their value will increase in line with rising prices in the long term as they will cost more to replace. What’s more, any revenue streams tied to these assets are usually linked to inflation. 

Infrastructure stocks to buy

Considering these factors, 3I (LSE: III) no is one of my no-brainer FTSE 100 shares to buy now. This enterprise is one of a handful of UK shares with exposure to infrastructure assets. It owns and manages a portfolio of infrastructure funds and private businesses. 

Over the past couple of years, this diverse portfolio has enabled the group to benefit from rising asset values in the private equity industry and the booming infrastructure market. 

Unfortunately, this is not the perfect business. The company does have a high level of debt, which could become problematic if interest rates rise. This is probably the biggest challenge it will face in the years ahead. Finding funding to finance new deals will also become a challenge if interest rates rise significantly. 

FTSE 100 value creation 

Despite these headwinds, I would buy the shares for my portfolio. 3I has a strong track record of building value for shareholders. It has also spent over a decade developing the connections required to gain access to the most lucrative deals. This is an advantage not necessarily displayed in the company’s share price. Without this competitive advantage, other corporations may struggle to build exposure in the industry. 

Commodity prices tend to rise in lockstep with inflation in the long run. As such, I think buying a commodity-focused business is the right decision in the current environment. There are a number of options in the FTSE 100, but my favourite is Glencore (LSE: GLEN). 

As there are plenty of reasons not to own this business, I will start with the negatives. The group has a lot of exposure to the coal industry, which could lump it with significant environmental liabilities. Its business model also requires a lot of debt, which could become an issue as rates rise.

Glencore has also been the subject of several serious corruption allegations. These could hurt the firm’s ability to do business in several regions. 

Significant tailwinds

But I think the company’s positives offset these negatives. This year, the coal price has jumped as countries clamour to generate enough energy to keep the lights on. It does not look as if this trend will change anytime soon, suggesting Glencore has made the right decision, for now.

The company is also the world’s largest commodity trader. This requires a lot of leverage and vast economies of scale to work successfully. The business has the resources available to it to attack this market. Many other firms just do not have the scale or resources to compete successfully. 

These qualities are (and will remain) huge competitive advantages as the economy returns the growth. The demand for essential commodities is surging, and Glencore can meet this demand. If resource prices rise in line with inflation over the next few years, the group’s profits should follow suit. 

Considering these tailwinds, I think the stock is worthy of a place in my portfolio of no-brainer FTSE 100 shares. 

Many of the stocks that are performing well right now have P/Es well over this level. But there are some around that have lower P/Es too. This is important, because it suggests that these stocks could be undervalued compared to the average FTSE 100 stock. This in turn means that their share prices could rise in the near future. 

Hikma Pharmaceuticals: beaten down FTSE 100 stock

One such stock is the pharmaceuticals company Hikma Pharmaceuticals. It has a P/E of 15.2 times, which is not terribly low, but is still lower than average. This leaves some room for growth. But I believe that there could be even more upside considering that it has just delivered robust results.

Moreover, its share price has come off in the past year. As I write, it is down by more than 12% from the same time last year. I think this is a good reason to buy the stock, which has given some 300% return over the last 10 years, albeit with a fair bit of fluctuation in the intervening period. It is definitely a stock on my wish list right now. 

Persimmon: attractive dividend yields

The FTSE 100 house builder Persimmon has a similar story. It has a relatively low P/E of 11.2 times, at least partly because its share price has gone nowhere in the past year. In fact, it has shown a small decline. But over the past decade, it has been an excellent stock to hold. It has grown by more than 500% over this time! And here is another good bit: it also has an attractive dividend yield of 6.5%.

The outlook for property stocks is a bit iffy for next year considering that supportive government policies are being withdrawn. Yet, over the long term, I think this is a winning stock, even if it sees ups and downs during the course of the business cycle. I bought the stock for the long term for this reason a few months ago. 

3i: impressive returns

Last is the investment company 3i, which has given the best returns among the three stocks in consideration here, of almost 700% over the last 10 years. It has also risen some 30% over the past year, though its P/E remains low at 4.5 times. If I consider its price to net asset value, the more popular indicator for measuring investment companies’ value, it does appear a bit overvalued.

Still, it recently delivered good results and is also optimistic about the future, which suggests to me that at a buoyant time for the stock markets, its share price could continue to rise. The stock is a buy for me.

UK shares to buy for growth

One of my favourite companies on the London Stock Market at the moment is animal pharmaceuticals group Dechra (LSE: DPH). 

While this company is a little more expensive than the sorts of businesses I am usually attracted to, I think it is worth paying a premium to take part in its ongoing growth. At the time of writing, the stock is trading at a forward price-to-earnings (P/E) multiple of 42. 

Considering its portfolio of unique products, I do not think this is too demanding. What’s more, Dechra’s growth has been nothing short of outstanding over the past six years. Net profit has grown tenfold since 2016. 

Investors should never use past performance to guide future potential. However, in Dechra’s case, it shows the company has the skills and drive required to develop and market new animal treatments. 

If this trend lasts and earnings continue to grow, I do not think I will regret paying a higher multiple for the shares today. 

That being said, the organisation does not have exclusive rights over the animal pharmaceutical market. This is a competitive industry, and growth is not guaranteed. If Dechra fails to invest enough, it may struggle to maintain its market share. 

Slow and steady

Infrastructure is not the most exciting sector. Nevertheless, investing in it is essential for countries around the world. 

3I (LSE: III) manages a selection of infrastructure funds and private equity businesses. The company is unlikely to achieve the sort of growth Dechra has recorded over the past six years. However, I believe that as long as there is a demand for maintaining and growing infrastructure, 3I will have growth potential. 

The company is also a dividend champion. Infrastructure and maintenance and construction contracts are usually inflation-linked. This suggests 3I’s profits should grow in line with inflation.

That also implies management could increase the company’s dividend at a similar rate, providing some protection in an inflationary environment. There is also potential for dividend growth as the infrastructure market expands. 

At the time of writing, the stock supports a dividend yield of around 3%. 

These are the reasons why I would buy the company for my portfolio of UK shares. It is a defensive income champion with the potential for substantial growth over the next few years.

Potential challenges the group could encounter include higher interest rates, which may increase the cost of its borrowings. Further coronavirus restrictions would also disrupt operations and reduce income. 

3i posts positive trading update

The company has said that a “significant majority” of its investments have shown strong performance. It highlights the Dutch retailer Action in particular, which is also its biggest investment. It calls the company’s performance “impressive” in terms of sales, earnings, and cash generation. 

What’s next for its share price?

Its share price has not responded much to the update — in fact, it is down by 1.5% as I write. I would not read too much into this, though, because the trend can change before the end of day. And going by past investor reactions to its financial results, I think this is actually a good opportunity to buy. 

I had last written about the stock in July, just when it released first-quarter results for its current financial year. In that week alone, 3i’s share price jumped by around 10%. It increased 4% on just the day of the results. And it has not fallen back to its pre-result levels since. 

If that is anything to go by, a similar outcome is possible when it releases its detailed half-year financials. Even if the share price does not react quite the same way as it did the last time, it is still a good stock to buy going by the annual price increase seen in the stock. Further, over the past five years, its share price has more than doubled, which shows that it is a performer over the relatively long term. 

Dividend payout

A less significant, but also not completely trivial benefit of buying the 3i stock is the dividend payout, I think. It is around 3%, which is lower than the FTSE 100 average of 3.5%. At the same time, it is higher than that of many other growth stocks. Moreover, over the past five years, the yield has been 3.6%. That brings it closer to the average FTSE 100 yield. And if the company continues to perform, it may even increase its dividends. 

What can go wrong

However, I think it is essential to recognise that the nature of 3i’s investments can determine its performance. I am particularly cautious of its infrastructure segment at present, in light of China’s Evergrande debacle. Even if there are no real spillovers outside of China, it could signal to investors to be more cautious of investments in the sector. 

Also, 3i’s investments in companies like Scandlines, which provides ferries between Germany and Denmark, could continue to suffer as travel has yet to return to its pre-pandemic levels. Further, if the economic recovery stalls, it could impact the valuations for all its investments. 

Would I buy the FTSE 100 stock?

However, for now, the recovery is headed in the right direction. And going by 3i’s performance so far, chances are that it will show healthy growth this year too. It is still a buy for me. 

#1. 3i: continued growth

The first one I like is the private equity and infrastructure investment firm 3i (LSE: III). The company had a fantastic year in 2020. And from its performance update for the first quarter of the current financial year ending 30 June, it appears to be on a roll this year too.

The company’s earnings before interest, tax, depreciation, and amortisation, commonly known by its acronym EBITDA, more than doubled from last year. I reckon this can give fresh impetus to its share price. After showing impressive growth until recently, it has softened in recent weeks. And its price to earnings (P/E) ratio is still a low 6.5 times.

Even though its continued reliance on its investments in the Dutch retail store Action is not ideal, all things considered it is a pretty cheap stock for me to buy.

#2. Polymetal International: more than a gold price play

Another one I like is the precious metals miner Polymetal International, which has a P/E of 9 times. Its share price has been sliding downwards since peaking in August last year. But I think going by its robust financial health, it is only a matter of time before it starts rising again. In the meantime, it makes for a good income stock, with a dividend yield at 6.2%.

The only caution I have for this stock is that its performance could get hit this year because precious metal prices are not quite as much in demand as they were in last year’s bear market. But then again, it showed robust performance even before last year. I have already bought the stock and am considering buying more of it now.

#3. Segro: a long-term FTSE 100 stock to hold

FTSE 100 warehouser Segro is another stock I like with a sub-10 times P/E ratio. The company benefited significantly from the e-commerce boom last year, leading to an almost consistent rise in share price since last year’s market crash. But it was broadly rising even earlier. 

Looking forward, I think e-commerce related companies will only continue to gain over time as online shopping becomes a norm. So, for me the likes of Segro are long-term investments.

In the short-term though, I think there could be some pull back in performance from last year. But this is only because the past year was an outlier. And there is also a possibility that online sales may just not slow down. As such, I expect its overall story to remain intact. It is a buy for me.