Whether it’s growth or dividends, UK shares can be great investments. In my investment portfolio, I have stocks from both the FTSE 100 and the FTSE 250.
Working out what shares to buy can be a challenge. But there’s a thought experiment I like to use when I’m figuring out what to invest in.
As an investor, I want to focus on the highest quality opportunities available. Since I don’t have unlimited funds, it’s important to me that I try and avoid second-rate opportunities as far as I can.
Should you invest £1,000 in Games Workshop right now?
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One way of doing this is imagining a genie appears and offers to double my net worth – but with one catch. I have to invest it all straight away in no more than two stocks.
Anything I invest in can’t be sold for 30 years, so my ability to generate a return depends almost entirely on the underlying business. Supposing I take the offer, the question is, what I should buy?
Ultimately, whatever I settle on probably deserves a place in my actual investment portfolio anyway. And right now, I think I’d opt for a pair of passive income opportunities.
Games Workshop
The first stock is Games Workshop (LSE:GAW). The company looks like it combines the best elements of both growth and income stocks.
Widening margins and increasing revenues have helped the business grow its earnings per share at an average of 32% a year over the last decade. That’s impressive.
There’s also a dividend with a 4.25% yield on offer. And the company’s low capital requirements puts it in a strong position to maintain this.
A price-to-earnings (P/E) ratio of 23 is a risk – it requires growth to continue and this can’t be guaranteed. But this is an unusually good business I’d be happy to own shares in for a long time.
The PRS REIT
Another stock I’d choose is The PRS REIT (LSE:PRSR). The firm’s a real estate investment trust (REIT) that leases a portfolio of houses around the UK.
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As a REIT, the company distributes 90% of its rental income to investors as dividends. So I can buy shares, do nothing, and receive a 5.15% return a year in cash.
PRS has £415m in debt, which is a lot for a £426m firm. Investors should be aware that if the company can’t refinance this when the time comes, the dividend’s likely to fall.
Around £352m is fixed at 3.8% for an average of 16 years though. Within that time, I’d expect the business to find an opportunity to refinance, maintaining its dividend along the way.
Going all in
Fortunately, I’m not required to invest 100% of my net worth. But even if the situation isn’t realistic, thought experiments like this can reveal important insights when it comes to finding stocks to buy.
I’m looking to build a diversified portfolio, but I’m also not looking to compromise the quality of my investments along the way. I want all of my investments to be ones I’m confident in.
A good way of assessing this is by thinking about whether I’d be happy going all in on that stock if I had to. If so, there’s a decent chance it’s a stock I should consider buying.
