What I’m looking for

Just picking shares with the highest dividend yields in the index, and then holding for years at a time, isn’t always a foolproof strategy. There are times when a company may begin to see falls in its share price due to its underlying business performance. Consequently, an investor could find themselves in a situation where all passive income is offset by capital losses on the investment.

For this reason, when looking for two shares to generate passive monthly income, I’ve aimed to look at a multitude of factors, not just yield. My primary focus is on finding simple yet high-quality companies. I often think of a high-quality company as one that has steady earnings growth. It will also generate significant free cash flow, and have low levels of debt. These may not be the most active investments and are unlikely to generate huge share price gains. But this approach is often the best way to generate passive income.

A prime example of what I’m looking for is Sage Group (LSE: SGE). A UK-based provider of accounting and enterprise resource planning (ERP) software, it operates predominantly in the UK, US and Europe, and has been active for almost 40 years. 

It would be fair to say the company has had a fairly volatile few years. After falling over 22% in 2020, it then experienced a considerable rebound of 46.5%. Subsequently though it has given much of these gains back by falling almost 18% in 2022. Consequently, the company is down 11.8% from pre-pandemic levels.

Strong underlying fundamentals

When looking at Sage Group from an income perspective, it’s encouraging to see that the company has paid a dividend for 30 years. It has also grown that yield for the last 21 years. It currently offers a dividend of 2.5%, which is below the index average of 3.8. So even though it’s not the highest yield, it’s still a fair return if delivered consistently.

And its underlying fundamentals are strong. The firm has significant cash flow generation and a good level of earnings efficiency on invested capital. It has also had a profit margin averaging 21.8% over the last three years.

A high valued share

However, it’s important to note that it’s trading at a price-to-earnings ratio of over 30. This is despite the share price falling almost 18% this year. This is very high in the current market. It could indicate that the company is potentially overvalued, regardless of its strong underlying fundamentals. Furthermore, the current dividend yield isn’t as high as most typical income shares, and this could become an issue if this level is reduced in the future.

Nonetheless, I believe Sage Group presents a unique opportunity to access a consistent dividend yield in a company with strong underlying fundamentals. I’m tempted to add it to the income section of my portfolio over the coming weeks for monthly passive income.

The biggest misconception when it comes to selecting a good income-generating share is to focus on picking companies that offer the highest dividend. Instead, I like to look for companies that offer a reasonable dividend, normally in the region of 2-3%. The company should also have been paying this dividend consistently for over 20 years.

Sage Group

The first company on my list is Sage Group (LSE: SGE), a provider of accounting software. The company focuses primarily on the UK, USA, and Europe, and has been operating for almost 40 years.

Sage has paid a dividend for 30 years and has grown that yield for the last 21 years. It currently offers a dividend of 2.6%, which — although not the highest in the index — is still a fair return if delivered consistently.

The underlying fundamentals of Sage are also strong, with significant cash flow generation and considerable profit margins. However, it’s important to note that despite the share price falling almost 19% this year, it’s still trading at a price-to-earnings (P/E) ratio of 30.3. This is very high in the current market. Indeed, it could indicate that the company is potentially overvalued despite its quality fundamentals.

Nonetheless, I believe that the opportunity to access such a consistent dividend yield is worth paying a premium for. Therefore I would add Sage Group to the income stock section of my portfolio.

Diploma

The second company on my list is Diploma (LSE: DPLM), an industrial product supplier based in the UK. The company currently offers a dividend yield of 1.9%, although this is forecast to increase to 2.2% next year.

Diploma has also paid a dividend consistently for 30 years. The company has grown its yield for over 20 years. This level of consistency is why I would still consider the company a good income-generating share, despite the yield being lower than many of the typical examples of dividend-focused investments.

Furthermore, the company has very encouraging underlying fundamentals. It has significant cash generation, high forecast earnings growth, and a respectable level of earnings efficiency on invested capital.

That being said, the company is currently trading at a P/E ratio of 26.1. This is above the FTSE 250 average P/E ratio of 22 over the last 30 years. It is also worth mentioning that the current yield of 1.9% is considerably below the average FTSE 250 yield of 3.5%. This could indicate that the company may be overvalued. Furthermore, this increases the risks of share price declines over the next few years, potentially offsetting any income generated.

Despite this, I do consider Diploma to be a good income investment opportunity, as its consistent and growing dividend yield is worth paying a premium for. Therefore, I would add the company to my portfolio.

A rare tech gem in the FTSE 100

One company that has caught my eye recently is Sage Group (LSE:SGE). The software firm is an established global player with a robust business model and strong cash flow. It’s the third-largest business software provider in the world, used by over 6m people/businesses worldwide.

The company offers its products on a subscription basis and has an impressive 99% renewal rate since 2019. Sage saw its annual recurring revenue grow by 7.7% in the financial year (FY) 2021. 

Using this cash, the company has been developing its cloud storage business, which is projected to be a $40bn industry by 2030. This venture brought in £997m last year, which contributed to the 5% annual revenue growth. 

However, Sage Group primarily works with small and medium-sized businesses in the US, Europe and Asia. While its business management software sees strong renewal rates, a recession could change this. Rising bills will force businesses to cut extra costs, including software services.

But I’m still bullish on the firm given its cash-rich business model and strong global presence. Despite economic concerns, Sage’s financials make it a market leader. The tech firm is also reinvesting and expanding which is why it’s on my watchlist of top FTSE 100 shares. 

Tested product, new market

Historically, businesses with an established business model and brand strategy have found it easier to expand into global markets. McDonald’s Corp’s highly successful model is the best example.

Burgers were largely unknown in Asian countries like India and Korea. But McDonald’s is now a major force in these countries. Thanks to targeted products and marketing, the fast-food chain has established thriving businesses in very diverse culinary markets. Airtel Africa (LSE:AAF) is doing the same thing with mobile connections. 

Using the business model perfected by its parent company Bharti Airtel in India, the telecoms firm has become a premium service in Africa. The company quickly identified one key product that could put it above the competition. 

By deploying Airtel Money, a mobile-to-mobile fund transfer service, Airtel Africa tapped into one of the world’s largest digital payment networks. This attractive, low-cost model has caused Airtel Africa shares to jump over 300% since the pandemic.

The biggest threat it faces is 5G expansion and growing competition. Africa is fast becoming a target for global business superpowers. Given the earnings potential for telecom firms in the region, Airtel Africa could be undercut by giants like Verizon when bidding for 5G bands in the future. 

However, the company has been careful in securing some key territories that put it in a strong position going forward. I’m watching this FTSE 100 share very closely and could be tempted to make an investment in the coming months. 

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

GSK 

What it does: GSK is one of the world’s top 10 largest pharmaceuticals producers thanks to drugs like Tivicay and Advair. 

By Royston Wild] 

The GSK (LSE: GSK) share price has plummeted during the past month amidst fears over stinging legal action in the US. It is believed a swathe of lawsuits related to its Zantac heartburn treatment could cost it billions of dollars. 

However, I believe the threat of such colossal damages is now well baked into GSK’s share price. I’d buy the FTSE 100 business owing to its exceptional defensive qualities. The essential nature of its operations should help profits to remain robust even as the global economy toils. 

In fact, latest financials show that the pharma giant is actually going from strength to strength. Total sales rose by almost a fifth between April and June, to £6.9bn. 

City analysts have been upgrading their profits forecasts following the news. They now think GSK’s earnings will rise 10% year on year in 2022 and 8% next year, too. 

This means that today GSK trades on a forward P/E ratio of just 11.4 times. I think this represents super value for money for this growth stock. 

Royston Wild does not own shares in GSK. 

Melrose Industries

What it does: Melrose Industries is a holdings business that seeks to acquire and improve struggling engineering firms.

By Zaven Boyrazian. Melrose Industries (LSE:MRO) is a holdings company. The group acquires underperforming engineering businesses intending to turn them around before selling them on at a higher price. But the engineering sector, especially aerospace, hasn’t exactly had a great time since early 2020.

Fortunately, now that the travel sector is ramping back up, Melrose’s future looks much brighter. The company has an excellent track record of delivering successful turnarounds. And assuming it hits its margin targets, earnings should be set to swell over the coming years.

There is an undesirable £1.7bn of debt equivalents on the balance sheet that is likely to become more expensive to service as interest rates get hiked. But with just over £470m of cash in its war chest, I see no immediate solvency risk.

That’s why I believe Melrose stock has some solid growth potential as it recovers to its former glory.

Zaven Boyrazian owns shares in Melrose Industries.

JD Sports Fashion

What it does: JD Sports Fashion sells sports fashion and outdoor footwear and apparel. 

By Paul Summers: I can understand retail stocks not being popular with investors right now. Even so, the near-halving of growth stock JD Sports Fashion (LSE: JD)’s share price in 2022 feels a bit overdone. 

Yes, not many people will be loading up on pricey trainers in the current environment. And, yes, being forced to sell Footasylum for less than half the price it paid to acquire it due to concerns from the UK’s competition watchdog won’t have boosted investor confidence. New CEO Regis Schultz has his work cut out.

Still, I reckon there’s a good brand here. A price-to-earnings (P/E) ratio of nine could also prove excellent value if JD meets its own conservative earnings estimates when half-year numbers are announced on 22 September. Encouragingly, there’s no interest from short sellers as things stand.

I suspect JD will deliver the goods again once confidence returns.

Paul Summers has no position in JD Sports Fashion

Sage

What it does: Sage is a leading provider of cloud-based accounting and payroll solutions for small- and mid-sized businesses.

By Edward Sheldon, CFA. My top growth stock is Sage (LSE: SGE). To my mind, it offers growth (and quality) at a reasonable price.

Sage’s most recent trading update, for the nine months to 30 June 2022, showed that the company is generating solid growth right now. For the period, recurring revenue was up 9% to £1,330m while organic total revenue was up 6% to £1,412m. Looking ahead, the company said that it now expects organic recurring revenue growth for this financial year to be towards the top end of its guidance range of 8-9%.

As for the valuation, Sage currently trades on a price-to-earnings (P/E) of around 26 (using next financial year’s projected earnings). That is higher than the average FTSE 100 P/E ratio. However, I don’t think it’s excessive given that Sage is a high-quality software company with recurring revenues.

Of course, this company is not without risk. One issue to consider is that new competitors are popping up. Overall, however, I think the stock has considerable appeal right now.

Edward Sheldon owns shares in Sage.

Rolls-Royce Holdings

What it does: Rolls-Royce is a British-based multinational aerospace and defence company that’s been struggling since the pandemic.

By Dylan Hood. Rolls-Royce (LSE:RR) shares have struggled to gain any real momentum since the onset of the pandemic. Currently sitting at 80p, they have fallen 37% year-to-date and 30% over the past 12 months. However, earlier this year, Rolls released results which highlighted the firm had turned a profit for the first time since its £4bn loss in 2020.

In addition to this, its more recent H1 2022 results revealed a record order intake for Power Systems and a momentous £1.1bn improvement to cashflows. The firm is also leading the charge in small to medium nuclear reactor technology and has already signed contracts with governments around the world to implement this technology after their approval (expected in 2024).

Finally, as the threat of the pandemic becomes less prevalent, flying hours will continue to increase. Already in 2022, they have climbed 42% compared to 2021. Rolls makes most of its money servicing jet engines, so this is another big plus.

Dylan Hood does not own shares in Rolls-Royce.

Watches of Switzerland

What it does: Watches of Switzerland is a British luxury retail group that specialises in selling Swiss watches and jewellery. It also offers insurance and repair services.

By John Choong. With inflation expected to continue heading upwards, I’m turning my attention to luxury goods. This is because luxury goods tend to have inelastic demand and are catered to a niche market that either benefits from high inflation or isn’t very much affected by it.

This was evident in Watches of Switzerland’s (LSE: WOSG) latest trading update which showed positive numbers. The FTSE 250 firm saw its revenue grow by 31% while many other retailers continue to suffer declines on a year-on-year basis. The outlook given by management was also generally positive as it expects to ends it financial year with 17% to 21% revenue growth, while expanding its offices, showing confidence that demand for its products are still hot.

While revenue growth slowed exponentially from its pandemic highs, I think a reasonable price-to-earnings (P/E) ratio of 19 and an average price target of £13.37 makes this stock a lucrative one for my portfolio. As such, I’ll be looking to add Watches of Switzerland to my portfolio in the near future.

John Choong has no position in Watches of Switzerland

S4 Capital

What it does: S4 Capital is a digital marketing agency network.

By Christopher Ruane. It has been a brutal few months for shareholders in S4 Capital (LSE: SFOR), with the growth shares trading for less than a fifth of where they stood a year ago.

Revenue growth remains strong and I think that even in an economic downturn, demand for digital marketing should stay high. The problem for S4 is its business model. Growing costs threaten to delay the path to profitability. Internal control systems have been found wanting, leading to delays in publishing results.

Many investors have abandoned the shares. But directors have been buying and I think the basic business model remains promising. There is work to be done in scaling quickly without letting costs balloon, as well as restoring investor confidence. I expect chairman Sir Martin Sorrell to address those concerns fast.

Meanwhile, I think the huge fall in the S4 Capital share price presents a buying opportunity for my portfolio.

Christopher Ruane owns shares in S4 Capital.

The London Stock Exchange Group

What it does: the company runs the London Stock Exchange. It also provides data and clearing services via its subsidiaries.

By Stephen Wright. In my view, The London Stock Exchange Group (LSE:LSEG) is one of the most interesting companies in the FTSE 100. I was very impressed with its most recent trading update and that’s why the stock is my top UK growth stock for September.

The company has three major segments – capital markets, data and analytics, and clearing services. Each of these reported solid results. As a result, profits this year are 21% higher than they were a year ago.

Until recently, I’ve found the London Stock Exchange Group difficult to value. Its recent acquisition of Refiniitv made its accounts a little complicated.

More recently, though, things have settled down. I think that the stock is trading at a price-to-earnings (P/E) ratio of around 20 and I think that it’s good value at those levels.

Stephen Wright does not own shares in The London Stock Exchange Group.

Harbour Energy

What it does: Harbour Energy is a UK-based oil production firm that operates across the North Sea, Asia, and Central America.

By Andrew Woods. In the past month, the shares in Harbour Energy (LSE:HBR) are up 25%. Recently, the company has been benefiting from higher oil prices, with Brent crude currently trading above $100 per barrel.

For the six months to 30 June, the business reported that pre-tax profits grew to $1.5bn, up from $120m for the same period in 2021. What’s more, its guidance range for full-year production increased from between 195,000 to 210,000 barrels, to between 200,000 to 210,000 barrels.

Furthermore, the firm stated that it was embarking on a $300m share buyback scheme, up $100m from previous announcements.

Financially, the company has a cash balance just under £600m, and total debt of £3bn. This debt would be something I’d like to see fall in coming months, because it appears to be quite large.

Overall, though, production is solid, and the broader economic situation seems to be favouring the company, hence it may have scope to grow.

Andrew Woods has no position in Harbour Energy.

Different types of tech company

The idea of a tech company means different things to different investors.

For some people, investing in tech is about getting into an industry still in its formative stages. Even if it is loss-making today, hopefully market expansion and scalability could help winning companies profit from it in future. This is a common logic for investing in the likes of Deliveroo or Ocado.

But other tech companies are already much further down the commercial path. They have proven their business model and are consistently profitable. The tech angle of their business model gives them benefits of scalability already, which can be good for profitability. That describes companies such as Microsoft and Apple.

Sage and the tech model

It also describes Sage Group. The company has been selling accounting software for decades already.

That does not sound very glamorous. But Microsoft has done tremendously well out of products such as Excel that, although unexciting, play an important role in many businesses. I think that is also true of the accounting software provided by firms like Sage Group. Millions of companies need to do their accounting and software makes that a lot easier for them. There is a cost to switching such a system, once users are used to it and the database contains historical information. That gives a supplier such as Sage pricing power. Many users will accept a price increase rather than suffering the trouble, expense, and uncertainty of switching to a different piece of software.

That helps explain Sage Group’s attractive 15% post-tax profit margins last year. As a 3% slide in revenues showed, however, there are risks here. The marketplace is crowded with well-funded competitors. They may undercut Sage on price to lure customers. That could hurt sales and profits at Sage. Both fell last year.

Could Sage Group shares fit my portfolio?

Although I like the business model, the current business performance seems a bit weak. Sage’s long run of annual dividend increases is appealing, but dividends are never guaranteed.

A price-to earnings ratio of 30 looks expensive to me. At an attractive price I would be happy to add Sage Group shares to my portfolio. But I do not plan to do that at the moment. I think the business could continue to benefit from the tech business model. But at the current valuation, I do not see the shares as a hidden gem.

Software for businesses

As a quick reminder, Sage is a software solutions provider that helps small to medium-sized enterprises with their accounting. Accounting is a mandatory part of business so companies can keep up with their finances.

Recent macroeconomic headwinds have not been kind to many UK shares. Soaring inflation, the cost-of-living crisis, coupled with rising costs and the supply chain crisis has weakened the economic outlook. In addition to this, the tragic events in Ukraine and issues noted above caused a stock market correction in March.

So what’s happening with Sage shares currently? Well, as I write, they’re trading for 629p. At this time last year, the stock was trading for 690p, which is a 8% fall over a 12-month period. In 2022 alone, they’re down 26% from 852p to current levels. Furthermore, in the face of economic issues, many investors have moved away from growth stocks like Sage to more defensive shares.

UK shares have risks

One of Sage’s most attractive selling points in recent years has been its remarkable growth journey. When I look at its share price, it looks like any recovery or further growth could already be priced in, however. This is despite the fact the shares have fallen in recent months. They’re currently on a price-to-earnings ratio of 23, which could be considered expensive.

In the tech world, competition is intense. There are many players vying for market dominance. In recent times, tech firm Xero launched its own accounting and payroll software too. This competition and current market outlook could hinder Sage’s performance and any returns I hope to make as a shareholder.

Why I bought Sage shares

In the face of soaring inflation, I want to ensure my holdings are providing me with passive income via dividend payments. Sage shares do just that. The shares are currently providing a dividend yield of just under 3%. I am aware, however, that dividends can be cancelled at the discretion of the business at any time.

Performance underpins dividend payments so let’s take a look at Sage’s numbers. I do understand that past performance is not a guarantee of the future, however. Sage has recorded consistent levels of revenue and profit over the past four years. This includes during the period affected by the pandemic, when many other UK shares saw performance levels dip.

Another aspect that I like about Sage is its growth journey to date. It has managed to grow organically as well as through acquisitions. I like when a business acquires others to enhance its offering and boost performance as well as shareholder returns. Finally, it has moved with the times in terms of technology too. It recently adopted a software-as-a-subscription (SaaS) model, replacing its old on-premise model. This should help increase performance and returns too.

I purchased Sage shares earlier in the year. Despite the shares falling a bit since I added them to my holdings, I expect them to bounce back over the longer term. Furthermore, I expect the shares to continue boosting my passive income stream as well.

One FTSE 100 tech stock I have my eye on is enterprise resource planning (ERP) software outfit Sage Group plc (LSE: SGE). The Sage Group share price is down 25.5% in 2022, which makes me think this could be a great opportunity to buy the shares for my portfolio at a bargain rate. Here’s why.

A reliable passive income stock

Sage Group is the world’s third-largest provider of ERP software, behind Oracle and SAP. The Newcastle-based business delivers cloud-based accounting, human resources, and payroll software solutions for small and medium-sized businesses. It has a truly global client base.

The stock’s current dividend yield is 2.9%, which is below the FTSE 100 average of 3.9%. Accordingly, it might not be first choice for investors seeking passive income, but I believe there are good reasons to consider this company for my portfolio.

The financial results for the first half of 2022 reveal a positive trajectory with a 5% year-on-year increase in organic total revenue to £924m. In addition, organic operating profit was up 4% to £184m. The company has issued guidance that recurring revenue growth will be in the region of 8% to 9% for FY22.

Strong finances are the foundation for reliable future dividend payments. For me, Sage Group doesn’t disappoint in this regard. What’s more, growing the dividend over time is one of the company’s stated capital allocation priorities.

I also like the company’s balance sheet. The group has an underlying cash conversion rate of 120% and £1.2bn in cash and available liquidity. Although they don’t offer a bumper yield, I view Sage Group shares as some of the most dependable passive income investment options in the stock market today.

Risks for Sage Group shares

The company is currently undergoing a transition. This involves a managed decline in software and software-related services as a revenue source. There was a 24% reduction in this revenue category in H1 2022.

Sage Group also recently disposed of its Australian and Swiss businesses, as well as its South African payroll outsourcing division.

Although the aim is to boost profitability by becoming a subscription-based software-as-a-service (SaaS) firm, it seems these plans have caused some concern among investors, depressing the Sage Group share price in the process.

A move away from its traditional licensing model could reduce cash flow and revenue, even if there are a myriad of opportunities for the company to capitalise on expanding its cloud offering.

Would I buy?

Tech stocks don’t immediately spring to mind when I think of the FTSE 100. Sage Group is a rare exception. I’m looking to expand my exposure to tech in the current stock market downturn in conjunction with my perennial search for good passive income investments.

Sage Group shares fit the bill on both fronts. While not without risks as the business model evolves, I’m drawn to the company’s solid finances and robust dividend history. I’d buy.

Recent price movements in stocks have been erratic because of issues like the pandemic and the Russian invasion of Ukraine. However, I think I’ve found two strong firms to buy soon. Why am I attracted to these businesses? Let’s take a closer look.

Sage Group: starting to turn things around

The first company I’m considering buying this month is Sage Group (LSE:SGE). This firm specialises in software for accounting and business purposes. It currently trades at 715p, up 17% in the past year. 

For the years ended September, between 2017 and 2021, revenue increased from £1.7bn to £1.85bn. In addition, profit before tax rose to £347m from £342m.

Earnings per share (EPS) declined from 30.28p to 23.09p. As a potential shareholder, this is concerning because I like to see consistent earnings growth.

Furthermore, the 2021 annual results were inferior to results during 2020, when the pandemic was at its worst. 

During this time, revenue and profit was higher and EPS was 27.43p. It’s potentially a worry that this British share will struggle to continue meet high expectations in the post-pandemic era. 

In more recent results, however, things do seem to have been going in a better direction. For the three months to 31 December 2021, revenue was up 8% year on year to £429m. 

There was also a 13% uptick in the company’s software subscription service. In addition, total organic revenue rose by 5% to £458m. This gives me hope.  

Howden Joinery: one of the best British shares

The second business I’m considering buying is Howden Joinery (LSE:HWDN). This is a supplier of kitchens and joinery products for the building trade. 

Between 2017 and 2021, revenue rose by about 50% to £2.1bn. Profit before tax also grew from £232m to £390m and, unsurprisingly, EPS increased from 29.9p to 53.2p.

By my calculation, this means the company has a compound annual EPS growth rate of 12.2%. This is both strong and consistent.

In 2021, the firm paid a total dividend of 19.5p per share, a yield of 2.5%. It’s encouraging to know that I may also be able to derive passive income by holding this growth stock.  

Investment bank Credit Suisse placed an ‘outperform’ rating on the business in February. Its target price is 1,030p. It currently trades at 780p, up 6.5% in the past year. 

Credit Suisse believes that Howden is continuing to exceed earnings expectations, although it might suffer from a slowdown in the home improvements sector in the near future.

Overall, both of these British shares are mostly built on consistent results. While there are potential challenges ahead for both of these firms, I think they could continue to perform well if held for the long term. I will be buying shares in both this month. 

Here, I’m going to highlight three dividend payers that strike me as great ISA investments right now. I think these stocks could help me generate some nice tax-free passive income, as well as some capital growth, in the years ahead.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

A FTSE 100 high-yielder

First up is Legal & General (LSE: LGEN), a leading provider of financial services. Recently, it declared a dividend payout of 18.45p per share for 2021, which equates to a very attractive yield of 6.6%, at the current share price.

I don’t usually invest in ‘high-yielders’ as they tend to be higher-risk investments. However, in LGEN’s case, I’m willing to make an exception. That’s because the company appears to have plenty of momentum right now.

Last year, for example, profit after tax jumped 28% to £2,050m while return on equity came in at 20.5%. On the back of this strong performance, the company raised its full-year dividend payout by 5%.

One risk to be aware of here is that the stock can be volatile at times. We saw this volatility earlier in the year. Yet I’m comfortable with share price ups and downs. I think the key with LGEN is to take a long-term view and enjoy the big dividends along the way.

A high-quality dividend stock

The next stock I want to highlight is Sage (LSE: SGE). It’s a leading provider of accounting software. The prospective dividend yield here is about 2.6% right now.

There are a number of reasons I like the look of Sage shares at present. One is that the company should be protected from inflation. Not only does it have a very high gross profit margin (companies with high gross margins are typically able to handle inflation well because rising costs don’t hurt their profits as much) but it also has the ability to raise prices.

Another reason is that the company has been buying back its own shares recently. This should push earnings up, over time.

Sage shares currently have a forward-looking P/E ratio of about 27. This valuation adds a bit of risk. I’m fine with it however. I see it as quite reasonable for a high-quality software company.

A small-cap dividend payer

Finally, in the small-cap space, I like Urban Logistics REIT (LSE: SHED). It’s a real estate investment trust that owns a portfolio of strategically-positioned warehouses across the UK.

SHED has been a reliable dividend payer in recent years and for the year ending 31 March, the group is expected to pay out 7.6p per share in dividends. At today’s share price, that equates to an attractive yield of around 3.9%.

It’s not just the yield that’s attractive here however. In my view, the stock’s valuation is also very appealing. At present, the forward-looking P/E ratio is just 21. Given that the UK warehouse market is absolutely booming right now, I think that’s a bargain.

The major risk here is that the company, like other REITs, sometimes raises new capital from investors to fund its expansion. This is important to know as it can have a negative impact on the share price in the short term.

As a long-term investor however, I’m not too concerned about this.

Accounting and payroll

Sage Group specialises in accounting and payroll software for small to medium-sized businesses. It recently shifted to a software-as-a-service (SaaS) subscription model to keep up with evolving technology and digital transformation.

As I write, Sage shares are trading for 681p. At this time last year, the shares were trading for 592p, which is a 15% return over a 12-month period. The shares are down almost 20% in 2022. I believe this is because many stocks in growth sectors like Sage, have experienced an investor sell-off. This has been caused by economic uncertainty, and led to investors looking at more defensive options. 

A UK share I like

In the event of a stock market crash, I’d add Sage shares to my holdings. Here’s why.

Firstly, Sage has a good track of performance, although I do understand past performance is not a guarantee of the future. Looking back, I can see it has recorded revenue of over £1.85bn for the past four years in a row. Coming up to date, a Q1 trading update released at the end of last month mentioned recurring revenue was up 8% compared to the same period last year. Furthermore, software subscription was up by 13% and new customer wins were also up.

Sage pays a dividend that could make me a passive income. At current levels, it sports a yield of over 2%. I do understand dividends could be cancelled in the event of a market crash. In Sage’s case, I’d expect the dividend to be reinstated over time.

Sage has a robust balance sheet that should see it through any downturn. When the last crash occurred, many UK shares had to borrow money to keep the lights on. Those with healthy balance sheets were able to weather the storm.

I believe the biggest risk to any stock market crash recovery and general growth for Sage is that of competition. In its respective sector, there are many players. One that springs to mind is tech giant Xero, which recently created its own payroll and accounting offering. This could hinder Sage and eat into its market share.

What could cause a market crash?

In 2020, it was a global pandemic the likes of which this generation has never seen. Other causes can be struggling world economies as well as surging inflation or major wars.

At this moment, it seems struggling world economies and surging inflation could cause a market crash. Inflation in the US is a concern. The last time inflation reached levels such as now was in 1982 and a crash occurred. In addition to this, another of the world’s largest economies, China, has seen its growth slow to levels not seen in approximately two years and is in the midst of a real estate crisis.

Finally, geopolitical tensions between Russia and Ukraine, including the mobilisation of troops, has led many to fear a war could break out. This could also lead to a stock market crash.

It is worth noting no one can accurately predict if a crash will occur. If it does, I have a list of UK shares I’d add to my holdings, including Sage Group.