A volatile stock market has caused investors to look for safety in precious metals. But I think the real bargains are in shares in businesses that can provide investors with passive income.
Against this background, the strong performance from gold mining companies this week is unsurprising. For me though, the opportunities are elsewhere at the moment.
Gold
I don’t think there’s anything wrong with buying gold as an investor. The usual objection is that it doesn’t have a cash flow, so it’s a purely speculative buy.
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Warren Buffett makes this argument well. If I buy two-thirds of an ounce of gold for £1,000, there’s only one way for me to make any money – I have to sell it for more.
The situation with stocks is different. If I invest £1,000 in shares in a profitable business, I can receive dividends for years to come and generate cash without having to sell my investment.
I don’t dispute any of the above. But the price of gold has tended to behave predictably, so owning gold can clearly protect against stock market volatility.
The real reason I’m not buying gold is I think there are better opportunities available elsewhere. Neither gold nor shares in gold mining companies looks like great value to me right now.
As I see it, today there’s a real chance to build a diversified passive income portfolio. I’ve got an eye on a couple of stocks – a UK bank and a US food company.
Barclays
It’s not a big surprise that Barclays was one of the worst-performing UK stocks last week. The bank has more US exposure than its FTSE 100 peers, putting it closer to the SVB crisis.
As a result, the share price has fallen by fallen by almost 11% over the last week and the dividend yield is now over 5%. At these prices, I think it’s undervalued.
The falling share price is reflecting a bigger risk. The turbulence in the banking sector could lead to tighter regulations, which could weigh on the bank’s profits in the long term.
Overall, though it looks to me like the market is overestimating this risk. Decisive action seems to have prevented a full-blown panic, so I think the stock is a bargain.
Kellogg
Shares in Kellogg have held up pretty well over the last week or so. But the stock is down around 10% since the start of the year.
The risk with Kellogg is it’s hard to see how the underlying business is going to grow. And trading at a price-to-earnings (P/E) ratio of 23, there needs to be growth.
Right now, the company is in the process of restructuring. Its plan is to spin off both its cereal business and its plant-based meat division to focus on its snack products.
The snack foods division has been growing. And I think this should give investors scope for growth going forward with a stock that pays a steady dividend.
I’ll buy
I’m expecting both Barclays and Kellogg to provide good passive income to their shareholders in the future. At today’s prices, I’m looking to buy both for my portfolio.
