His growth tips for 2021 rose an average 20% and the income ideas yielded 9.9%. Here are the three exciting growth stocks and three high-yield shares that our head of equity strategy is backing this year.
After the trauma of 2020, investors were treated to some spectacular gains in 2021. Every major stock market registered annual gains except China, Hong Kong and Brazil. Of course, financial markets never move up in a straight line, and the past 12 months was littered with banana skins, none more so than the recurring threat of Covid, a conveyor belt of new variants and the various social, political and economic effects.
Wall Street, which had already recovered pandemic losses by the end of 2020, used the following year as a chance to extend gains and regularly rack up all-time highs. The S&P 500, Nasdaq Composite and Dow Jones all smashed records in 2021, rising 28%, 23% and 19% respectively.
Germany’s Dax outperformed, too, adding 16%, but it was the French Cac 40 that topped the tables in 2021 with a 29% gain. The FTSE 100 continued to lag international peers for much of the time, especially during an extended summer lull. However, UK-focused investors did still make big profits in 2021, especially after an impressive 5% Santa rally in December.
The FTSE 100 ended 2021 with a 14.7% gain and the FTSE 250 added 14.9%. But small-cap fans were largely disappointed, with the AIM All-Share up a modest 4.4%. Remember, though, that the index had risen almost 21% in 2020 compared with losses of 14.3% for the FTSE 100 and 6.4% for the FTSE 250. And where else could you find so many stocks doubling in value and some returning as much as 1,000% over the 12 months? Stand up Quantum Blockchain Technologies (LSE:QBT).
Tip performance in 2021
UK stocks had underperformed international peers since the Covid recovery began in March 2020. That made them attractive to overseas buyers with deep pockets, especially while interest rates mean money is cheap.
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My growth tips for 2021 were clearly on the radar. Less than three months into the year Gamesys, owner of Jackpotjoy and other online bingo and casino sites, had received a bid approach from Bally’s. It was eventually bought for 1,850p per share in cash, a 42% profit on my tip price.
Scapa, which supplies tapes and adhesives to the medical and motor industry, didn’t last that long. By the end of January 2021, it had recommended an offer from Schweitzer-Mauduit International. At the beginning of March a deal was done at 215p, 17% more than my tip price.
My surviving growth tip – Ideagen (LSE:IDEA) – was a volatile investment. Having swung wildly lower then higher, it reached a peak of 335p in September for a 25% gain. However, the supplier of regulatory and compliance solutions finally ended 2021 up 3%. Despite that, the average gain for my speculative growth stocks in 2021 was 20%.
After a tricky year for dividends in 2020, last year proved a veritable goldmine. My three speculative income stocks generated an average dividend yield of 9.9%, a weaker pound helping dividends issued in dollars exceed my already lofty expectations. Some big capital gains were the icing on the cake.
AEW UK REIT (LSE:AEWU) justified my pick, generating a dividend yield of 10.1% in 2021. Shares in the trust, which directly owns a diversified portfolio of regional UK commercial property assets, also surged by 42%.
Diversified Energy Company (LSE:DEC), which traded as Diversified Gas & Oil when I tipped it, also delivered a double-digit dividend of 10.3%, although the share price eased 6%. Lastly, I’d spotted that investment giant M&G (LSE:MNG) boasted one of the cheapest valuations in its sector and one of the highest yields. Backing it in 2021 would have generated a 9.2% dividend yield.
Share price 86.5p; PE ratio 17.2; dividend yield 1.8%
Breedon (LSE:BREE) is one of the biggest and most successful construction materials companies in the country and has been a solid performer over the long term. It suffered one of its occasional declines is popularity mid-summer, but there are good reasons to be optimistic. In November, Breedon spelled out “the next chapter of growth”, including how revenue would outperform its markets. The outlook for infrastructure spending is encouraging, especially among aggregates intensive construction projects like highways. Valuation is also near the bottom of its historical range.
Franchise Brands (LSE:FRAN)
Share price 155p; PE ratio 27.2; dividend yield 1.0%
Building a portfolio of successful service businesses using a franchise model has been rewarding for this AIM company, whose brands include Metro Rod, Willow Pumps, Metro Plumb, ChipsAway, Ovenclean, Barking Mad, Azura Group and The Handyman Van. There’s already been a positive response to Franchise Brands (LSE:FRAN)' recent update, and the City expects profit to have grown by over 20% in 2021. The company generates plenty of cash, underpinning optimism about the year ahead during which profit is tipped to grow by strong double digits again.
Share price 342p; PE ratio 12.5; dividend yield 5.9%
Running Indian call centres and supplying back office outsourcing systems has been a lucrative business for iEnergizer (LSE:IBPO). Late last year, it published record first-half results and increased its dividend by 40% to reflect a similar increase in pre-tax profit. It’s also an indicator of the confidence management has in its growth strategy and outlook for the full year. It’s not a high-profile company and clearly hasn’t appeared on the radar of many investors, but consistent performance warrants a closer look at this AIM company.
Having searched high and low, I can't find any speculative income stocks that beat two of the three I picked a year ago. They delivered the goods then and they stand a great chance of doing it again in 2022.
Diversified Energy Company (LSE:DEC)
Share price 108p; PE ratio 13.9; dividend yield 10.0%
Its name has changed in the past year, but not much else. Diversified Energy Co (LSE:DEC) remains committed to returning cash to shareholders, offering a chance to generate a double-digit income in the year ahead. High margins are the big focus for this gas and oil production company operating in the Appalachian Basin in the US. Big profits demonstrated an ability to generate significant cash flow, which underpinned another dividend increase in October. It is also able to reduce debt and fund growth.
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Share price 212.6p; PE ratio 9.0; dividend yield 8.5%
M&G (LSE:MNG) briefly touched pre-Covid share prices last year and, after falling back, is on the rise again. But it’s the dividend we’re interested in, and there’s every chance it will generate a yield of close to 9% again in 2022. A strong balance sheet underpins both a payout that beats rivals and puts M&S in a good position to exceed its capital generation target of £2.2 billion for 2020-22. There’s execution risk in some areas, true, but M&G paid out last year despite serious doubts.
Share price £25.16; PE ratio 9.6; dividend yield 9.3%
This year's new pick is the country's largest housebuilder. Persimmon (LSE:PSN) shares are unpopular right now amid concerns about the strength of the housing market, rising costs, supplies and staff shortages. But those fears look overdone, and higher build completions and average sale prices brightened its recent trading update. Persimmon has already promised to pay back 125p to shareholders in 2022, giving a dividend yield of 4.8% at the current share price. Surplus capital will be returned separately in the spring, turbocharging the payout.
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