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This stock’s just surged 10%! Should you buy it for your ISA?

AO World (LSE: AO) is a stock that really charged in Friday business. The electricals retailer finished 10% higher in end-of-week business and was creeping back towards the six-month highs just shy of 100p punched in late December. I fear, however, that investors are getting a little too giddy given the fragile outlook for the UK retail sector, and suggest that a correction could be coming for AO World given the bulky share price gains of late 2019 and early 2020.

If anything my cautiousness has increased further after the Bank of England released data today on consumer borrowing. According to Threadneedle Street, the yearly growth rate in unsecured lending dropped to 5.7% in November from 6.1% in the previous month. Meanwhile net consumer credit of 600m last month was the smallest flow for six years and well down from the average of 1.1bn since July 2018.

Big ticket blues

Taken in tandem with the poor retail figures that we have been seeing over the past year, these numbers from the Bank illustrate just how stark the growing reluctance of consumers to part with their cash is becoming. And naturally, sellers of big ticket electrical items like AO World should be particularly worried, as sales of the items it sells (whether essentials or luxuries) are the first thing to suffer in times of intense political and economic concern like these.

Recent trading updates from other major sellers of expensive items have exacerbated the sense of concern too. Marshall Motor Holdings, for instance, announced in a pre-Christmas release that the market for automobiles has remained challenging, and that trading conditions had actually weakened further in the fourth quarter.

And in an earlier update, furniture retailer ScS Group warned that its own like-for-like orders were down 7.1% during the 17 weeks to November 23, a result that it said reflected ongoing economic and political uncertainties [that] are continuing to impact consumer confidence and spending.

Too much risk!

AO Worlds share price has carried on ballooning following better-than-expected results in mid-November, at which time its financials showed like-for-like electrical sales rising 4.5% in the six months to September. It now trades at a 60% premium to share price levels before the release, which I think is way too high.

Given the prospect that Brexit uncertainty will likely last through the whole of 2020 at the very least, a situation that would see shoppers keeping a tight rein on their spending, I fear that those hoping for a sustained recovery following that solid first fiscal half could very well end up disappointed.

Im certainly not tempted to buy right now, AO Worlds high forward P/E ratio of 69.9 times for the financial year to March 2021 the period in which its expected to snap back into profit giving me extra reason to fear a share price correction should the news flow indeed disappoint.

The high-calibre small-cap stock flying under the Citys radar

Adventurous investors like you wont want to miss out on what could be a truly astonishing opportunity

You see, over the past three years, this AIM-listed company has been quietly powering ahead rewarding its shareholders with generous share price growth thanks to a carefully orchestrated buy and build strategy.

And with a first-class management team at the helm, a proven, well-executed business model, plus market-leading positions in high-margin, niche products our analysts believe theres still plenty more potential growth in the pipeline.

Heres your chance to discover exactly what has got our Motley Fool UK investment team all hot-under-the-collar about this tiny 350+ million enterprise inside a specially prepared free investment report.

But heres the really exciting part right now, we believe many UK investors have quite simply never heard of this company before!

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Do this one thing now and you can put your state pension fears behind you

I fear for those who will be reliant on their state pension when they retire in 2030 years, because I dont think it will exist by then. Given the high rate of human population growth and rising global debt, I just dont see how anyone could be confident about it.

Thats why I took action early on. In my twenties, I made the decision to start investing. But more than that, I made the decision to start investing in growth stocks.

Why you should invest in growth stocks

Growth stocks are all about capital growth. You dont choose them for dividends or income, but because you want your investment to grow in value. However, growth stocks also tend to come with higher risk; growth stocks can have insanely high price-to-earnings (PE) ratio valuations. Growth stock companies can also be at risk from many other factors simply because they are smaller and younger than large, established industry monoliths. Its easier to for them to be knocked off-course.

But, its also easier for them to navigate stormy waters. Whereas a FTSE 100 giant may struggle to adapt to market trends due to its size, a much smaller growth company may be more nimble.

For those who can afford to take on a bit more risk before they retire, it makes sense to consider growth stocks.

Growth at a reasonable price

Growth at a reasonable price (GARP), as it was called by Peter Lynch, is a strategy that looks for attractive growth businesses that arent valued at lofty P/E ratios. Lynch, a former Fidelity fund manager, also usedthe price-to-earnings growth ratio (PEG) for valuation. This looks at the P/E ratio against the percentage growth rate of a company. For example, a company that is growing its earnings at 40% a year but is rated by the market on a P/E ratio of 20 times earnings would be classed as cheap due to a PEG ratio of 0.5.

Self-sustaining business models

One big problem of growth stocks is that they can be cash-guzzling and loss-making. That means that more cash is often required, from new shareholders, which dilutes the entire issued share capital. Existing investors dont like to see their percentage shareholdings in the business dwindle, so the markets reception of these fund raises can be extremely harsh if management doesnt plan ahead.

Thats why I believe its important to look for growth stocks that are have attractive PEG ratios but that also have self-sustaining business models. This reduces the overall risk of investing in growth stocks.A company that doesnt need external sources of funding to keep the lights on is a lot safer than one that does!

Bonus

One final factor that I like to see in agrowth company is management owning plenty of shares. Its much better for directors to be aligned with shareholders (preferably with their own skin in the game) than for them to have no equity or interest in the businesss success.

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Not only does this company enjoy a dominant market-leading position

But its capital-light, highly scalable business model has been helping it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns in fact, in 2019 alone it returned a whopping 151.1m to shareholders in dividends and buybacks!

And heres the really exciting part

We think now could be the perfect time for you to start building your own stake in this exceptional businessespecially given the two potentially lucrative expansion opportunities on the horizon that our analyst has highlighted.

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Buy-to-let investing could damage your chances of making a million. Here’s where I’d invest instead

I understand the appeal of investing inbuy-to-letproperty. I get it its stable and consistent income.

But if you want to make a million, then sticking to buy-to-let investing could be harming your chances. Stock markets have typically generated higher returns than property over time. Someone who is focused only on buy to let is missing out on a proven wealth builder in the stock market. One big criticism from property investors is that the stock market is risky, and that people will always need property. Thats true though house prices can fall too!

But what if you could get exposure to the stock markets returns, without taking on too much risk? If you buy five companies, then thats a very concentrated portfolio. However, diversification is investings one free lunch through owning many shares we protect ourselves from the effects of a bad stock that implodes.

For this reason, I believe stock market index trackers are a great way for many private investors to invest in the stock market.

A FTSE 100 tracker

A FTSE 100 index tracker is an exchange-traded fund (ETF) that buys shares in every FTSE 100 company. That means anyone who buys this ETF owns great companies such as Royal Dutch Shell, Vodafone, and HSBC. Its instant diversification, and FTSE 100 companies are typically stable and have consistent cash-flows and consistent dividends.

When investing, people should be looking at returns in the long term. If they need that cash within a year or two, then putting that cash into an index tracker is a gamble on the market. Who knows what can happen in two years? But the longer our investment horizon becomes, the more likely it is that well make money. As Benjamin Graham (the father of value investing) said, In the short run, the market is a voting machine but in the long run the market is a weighing machine.

An index tracker is relatively simple to set up, and we can even set up direct debit payments every month to automate the process. This means that well be able to take advantage of any weakness in the stock market as well buy more units of the same ETF when the price is low.

Individual stocks

As well as a solid tracker fund, I think it makes sense to pick individual stocks, so long as one is comfortable with those risks. Risk can be mitigated by knowing what youre doing. Picking stocks that have wide moats, with self-sustaining cash inflows, as well as profits and healthy dividends, are proven methods to help avoid losing money.

We only need to pick one winning stock to make a lifetime of investing worthwhile, and companies like Rightmove and Dart Group (owner of Jet2) have delivered large returns for shareholders. Are these companies so hidden out of sight that we couldnt follow the leads ourselves?

Sometimes a stock market winner is hiding right in front of us. But if all of your cash is set aside in buy to let, then you could be missing out on that upside.

The high-calibre small-cap stock flying under the Citys radar

Adventurous investors like you wont want to miss out on what could be a truly astonishing opportunity

You see, over the past three years, this AIM-listed company has been quietly powering ahead rewarding its shareholders with generous share price growth thanks to a carefully orchestrated buy and build strategy.

And with a first-class management team at the helm, a proven, well-executed business model, plus market-leading positions in high-margin, niche products our analysts believe theres still plenty more potential growth in the pipeline.

Heres your chance to discover exactly what has got our Motley Fool UK investment team all hot-under-the-collar about this tiny 350+ million enterprise inside a specially prepared free investment report.

But heres the really exciting part right now, we believe many UK investors have quite simply never heard of this company before!

Click here to claim your copy of this special investment report and well tell you the name of this Top Small-Cap Stock free of charge!


Three sectors to watch for in 2020

Investing is hard. It can be lonely, and it can be demanding, but most of all it can test our patience. The problem is that in todays market there are always so many reasons to sell.One only has to switch on the news to find a reason. Just this week, airstrikes in Iran have people in a pickle worrying about World War Three. This time last year we were worried about stagnant US growth. The year before it was something else.

Peter Lynch once said that bull markets climb a wall of worry, and its easy to see what he meant. Despite the overwhelming evidence of stock markets globally trending higher, many always choose to be bearish.

However, it pays to be optimistic.

Right now, these three sectors are where I think there may be some fantastic buying opportunities.

Oil & gas

With Greta Thunberg and the launch of the Extinction Rebellion, climate change is on everyones lips. But the reality is that the world still revolves around oil. Yes, the change to electric vehicles may be growing but right now petrol engines far outweigh electric, and will do for years to come.Electric vehicles are expensive, and emerging nations will use whatever fuel they can to power their own industrial revolutions.

Quality production companies that are low-cost operators will be able to weather any storms that hit the non-lean operators first.

Technology

Tech has always been hot, and it always will be. The profit potential from technology companies those that get it right, at least is eye-watering. High gross margins that can be realised because of a scalable platform can deliver large returns for shareholders.

Of course, tech is also always risky, as there is never any guarantee that the business will run smoothly. But, thats part and parcel of the investment opportunity. People who want more reward have to be willing to take on more risk in order to achieve that return. Sometimes the market has simply mis-priced a company completely.

By doing our research, putting in the hours, and looking at the quality of the businesses and financial statements, we may just be able to find the next hot stock early.

Copper

Copper is used in everything from electronics and transportation equipment to building construction, machinery, and consumer products. Demand for this metal especially for electric vehicles will grow, which means those companies that are able to supply copper efficiently could be in the money.To determine whether a copper company is economically viable, look at its all-in costs for production compared to its selling price.

Companies that have large amounts of cash sitting on the balance sheet may also be able to take advantage of straggling competitors.Getting exposure to this metal, in the right company and stock, could prove be a very astute investment in 2020 and the coming years.

The high-calibre small-cap stock flying under the Citys radar

Adventurous investors like you wont want to miss out on what could be a truly astonishing opportunity

You see, over the past three years, this AIM-listed company has been quietly powering ahead rewarding its shareholders with generous share price growth thanks to a carefully orchestrated buy and build strategy.

And with a first-class management team at the helm, a proven, well-executed business model, plus market-leading positions in high-margin, niche products our analysts believe theres still plenty more potential growth in the pipeline.

Heres your chance to discover exactly what has got our Motley Fool UK investment team all hot-under-the-collar about this tiny 350+ million enterprise inside a specially prepared free investment report.

But heres the really exciting part right now, we believe many UK investors have quite simply never heard of this company before!

Click here to claim your copy of this special investment report and well tell you the name of this Top Small-Cap Stock free of charge!


A rising State Pension age may mean you work past 65. I’d buy FTSE 100 shares to retire early

In the past the retirement age was 65 (and 60 for women), but it is set to rise to 67 over the next decade. As such, an early retirement may feel like an increasingly distant dream for many workers.

However, by investing in the FTSE 100, it is possible to build a large nest egg from which to enjoy a growing passive income in older age. The index appears to offer good value for money at the present time, and could deliver high returns that boost your financial prospects.

With tax-efficient accounts such as a Stocks and Shares ISA being cost-effective and simple to set up, now could be the right time to start planning for your early retirement.

Past performance

The FTSE 100s price level may only be around 5% higher than it was 20 years ago, but its performance since inception in 1984 has been strong. It has delivered a total return of around 9% per annum over the 36-year period. When compounded, this can lead to significant returns that turn even modest sums of capital into a surprisingly large nest egg.

For example, someone aged 40 who invests 200 per month in the FTSE 100 could have a nest egg of over 200,000 by the time they reach 65 years old. From this, an income of over 8,500 could be generated from the FTSE 100 since it has a dividend yield of 4.3% at the present time.

Clearly, investing a larger amount or holding shares over a longer time period could lead to a larger nest egg. Therefore, it may be a good idea to start planning for retirement as soon as possible to allow the FTSE 100s returns to compound.

Investing today

As mentioned, the FTSE 100 seems to offer a number of sound investment opportunities at the present time. Despite a strong performance in 2019, many of the indexs members trade on lower valuations than their historic averages. This may mean that they offer discounts to their intrinsic values especially since the prospects for the UK and global economies are relatively sound. This could equate to higher returns in the coming years than have been recorded in the recent past.

Investing in the FTSE 100 is relatively simple and cost-effective. Accounts such as a Stocks and Shares ISA can help to reduce your tax bill in the long run, and yet the cost of managing them is minimal. This means they are highly accessible to a wide range of investors. And regular investing features allow smaller investors to start building a retirement portfolio without commission charges severely reducing their overall returns.

Therefore, with the State Pension age set to rise in the coming years, now could be the right time to start building a nest egg. The FTSE 100 appears to offer a sound means of doing so, with a number of its members offering impressive long-term growth outlooks.

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Why I’m still avoiding buy-to-let in 2020

According to high-end estate agents Savills, over the next five years, rents in the buy-to-let sector will increase by around 15.4% on average across the UK. London will see a better performance, according to the study, with rents growing roughly 18.8%, but this growth is unlikely to start in 2020.

For this year, the property experts are forecasting rental growth in London of just 2%.

These mixed forecasts are just one of the reasons why I am avoiding buy-to-let property in 2020. While there are some green shoots in the market for landlords, on the whole, I think the property market looks much less appealing than stocks and shares.

As well as a lack of rental growth, I am also concerned about the regulations the government has recently introduced that have piled the pressure on landlords.

Whats more, the Conservatives also promised to bring an end to no-fault evictions in their manifesto, as well as introducing longer tenancies. However, so far, these rules have not become law and we will have to wait to see if Boris Johnson and his team make good on these promises before considering the impact the changes might have.

A great alternative

An excellent alternative for buy-to-let property is real estate investment trusts (REITs). These publicly traded vehicles invest in property around the UK and offer investors exposure to properties that would be impossible to buy as an individual, such as hospitals, supermarkets and even theme parks.

REITs offer exposure to property without you having to do any extra hard work. Experienced management teams are responsible for the day-to-day management of the properties, and these investment trusts are usually able to invest in the best quality assets before they hit the public markets.

Some trusts offer dividend yields of 5% or more and can be owned inside a Stocks and Shares ISA, so there is no further tax liability to pay.

Capital growth

The one downside of REITs is that they tend to underperform the rest of the market as capital performance is linked to property values, which dont tend to rise rapidly.

If it is capital growth youre after, growth stocks such as Wizz Air could be much better investments. Wizz is planning to triple the size of its fleet over the next eight years, which could lead to a tripling in earnings per share, and a subsequent threefold increase in the airlines stock price.

Other companies, such as Reckitt Benckiser offer exposure to the fast-growing and defensive consumer goods market. The other advantage these companies have over buy-to-let property is international diversification, which should protect earnings growth against any Brexit-inspired economic disruption over the next 12 months.

So, those are some of the reasons why Im still avoiding buy-to-let property in 2020. I think the stock market could provide much better returns with a lower initial investment and international diversification.

A top income share with a juicy 6% forecast dividend yield

Income-seeking investors like you wont want to miss out on this timely opportunity

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But heres the really exciting part

Our analyst is predicting theres potential for this companys market value to soar by at least 50% over the next few years…

He even anticipates that the dividend could grow nicely too as this much-loved household brand continues to rapidly expand its online business and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

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Here’s how much £1K invested in Lloyds Bank shares two years ago would be worth today

Lloyds Bank (LSE: LLOY) is one of the most popular stocks in the UK. Along with other FTSE 100 stocks such as Royal Dutch Shell, BP, and BT Group, Lloyds can be found within a lot of private investor portfolios.

Have Lloyds shares actually been a good investment in recent years though? Lets take a look at how much 1,000 invested in it two years ago would be worth today.

A frustrating stock

In my view, the best way to describe Lloyds share price performance over the last two years is frustrating.

Two years ago, the shares were changing hands for around 68p. This means 1,000 would have got you approximately 1,471 shares (Ive ignored trading commissions and stamp duty for simplicity).

Looking at the two-year share price chart, you would have actually enjoyed some capital gains immediately after buying as the shares shot up to 72p in late January 2018. However, since then, the stock has underperformed due to Brexit uncertainty and the PPI claims debacle.

Today, Lloyds shares trade for around 63p, meaning that, had you bought two years ago, youd now be down around 7.4% on your original purchase price. In other words, your original investment of 1,000 would now be worth about 926. Ouch.

Dont forget dividends

Of course, Lloyds share price only tells part of the story. Its important to factor in dividends as these would have boosted returns (the firm pays quite a generous dividend).

Looking at the dividend history, had you bought the stock two years ago, I calculate that you would have been entitled to 6.38p per share in dividends to date. On 1,471 shares, that equates to total dividends of roughly 94. Adding these to the value of your shares produces a total of 1,020.

So overall, if youd invested 1K into Lloyds two years ago, your money would now be worth 1,020 meaning youd just be in profit (it would just about be wiped out if we did count trading commissions and stamp duty).

Make no mistake, thats a disappointing return over two years. You may have been better off keeping your money in cash savings.

The takeaway?

So, what are the key takeaways from this analysis?

Well, for starters, it highlights the dangers of jumping on board popular stocks that everyone else owns. Just because a stock is popular doesnt mean it will be a good investment.

Secondly, the analysis highlights the dangers associated with focusing exclusively on well-known large-cap stocks. While Lloyds shares have gone nowhere over the last two years (as have the likes of Shell, BP, and BT), many smaller companies have produced amazing returns for investors.

For example, over the last two years, shares in JD Sports Fashion have risen nearly 140%, turning 1K into nearly 2.5K. Similarly, shares in identity specialist GB Group have risen 83%, turning 1K into more than 1.8K.

Ultimately, if youre looking for higher returns on your money, it can be a good idea to look outside the FTSE 100.

A top stock with enormous growth potential

Savvy investors like you wont want to miss out on this timely opportunity

Heres your chance to discover exactly what has got our MotleyFoolUK analyst all fired up about this pure-play online business.

Not only does this company enjoy a dominant market-leading position

But its capital-light, highly scalable business model has been helping it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns in fact, in 2019 alone it returned a whopping 151.1m to shareholders in dividends and buybacks!

And heres the really exciting part

We think now could be the perfect time for you to start building your own stake in this exceptional businessespecially given the two potentially lucrative expansion opportunities on the horizon that our analyst has highlighted.

Click here to claim your copy of this special report now and well tell you the name of this TopGrowth Stock free of charge!


Here’s how I’d invest £250 per month in a Stocks and Shares ISA in 2020

Stocks and Shares ISAs are a low-cost means for almost anyone to invest tax-efficiently. As such, now could be a good time to open an ISA and start investing for the long term. It could help you to retire early and enjoy improved financial freedom in older age.

Of course, deciding where to invest can be challenging, due in part to the range of assets that can be purchased in an ISA. However, through regularly buying shares in the FTSE 100 and FTSE 250, you could generate high returns in the long run.

Stock market appeal

In the past, holding assets such as bonds and cash has been popular among a wide range of investors. They offer lower risks than shares, and have delivered inflation-beating returns over the long run.

However, holding bonds and cash at the present time may not be an efficient use of your capital. Due to low interest rates, which are expected to rise at a slow pace over the coming years, the returns available on cash and bonds are likely to be disappointing. They may even fail to beat inflation over the medium term.

As such, investing in shares could be a better idea. The FTSE 100, for example, offers a dividend yield of 4.3% at the present time. This suggests that it could be undervalued, while its exposure to some of the worlds fastest-growing economies such as India and China may produce capital growth over the long term.

Regular investment

Regularly investing in shares is an excellent way to capitalise on the cyclicality of the stock market. It forces an investor to buy during periods of difficulty when share prices may be at a relatively low level.

During such times, an investor may naturally be inclined to avoid purchasing shares due to the potential for short-term losses. However, the track records of the FTSE 100 and FTSE 250 show that they have always recovered from their challenging periods to post higher highs.

Investment opportunities

As mentioned, a number of FTSE 100 and FTSE 250 shares may offer good value for money at the present time. Sectors such as healthcare and consumer goods could deliver high levels of growth in the long run as factors such as an ageing global population and rising consumerism in emerging economies catalyse demand. Likewise, sectors such as retail and banking have proved to be unpopular among investors, and could generate high returns as a result.

For smaller investors, buying units in an index tracker fund could be a good idea. They provide diversity and exposure to a wide range of companies that have historically delivered high-single-digit annual returns. Starting with a tracker fund via a regular monthly investment of 250, and going on to buy individual shares in the long run, could be a sound idea that helps your ISA to grow at a fast pace to improve your financial prospects.

A top stock with enormous growth potential

Savvy investors like you wont want to miss out on this timely opportunity

Heres your chance to discover exactly what has got our MotleyFoolUK analyst all fired up about this pure-play online business.

Not only does this company enjoy a dominant market-leading position

But its capital-light, highly scalable business model has been helping it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns in fact, in 2019 alone it returned a whopping 151.1m to shareholders in dividends and buybacks!

And heres the really exciting part

We think now could be the perfect time for you to start building your own stake in this exceptional businessespecially given the two potentially lucrative expansion opportunities on the horizon that our analyst has highlighted.

Click here to claim your copy of this special report now and well tell you the name of this TopGrowth Stock free of charge!


If you’d invested £1k in the FTSE 100 20 years ago, this is how much it would be worth today

Investing in the FTSE 100 has been a popular choice for a wide range of people over the years. Its performance since inception in 1984 has been strong, with it delivering an annualised total return of around 9% since then.

However, its performance over the past 20 years has been relatively disappointing. In fact, a 1,000 investment at the turn of the century would now be worth around 2,300. That works out as an annualised return of just over 4%, which is less than half of the indexs annual returns since inception.

Heres why that figure is so low, and why investors in the FTSE 100 could enjoy significantly higher gains in the coming years.

High valuation

Twenty years ago, the FTSE 100 was experiencing a strong bull market which was being fuelled by investor interest in the technology sector. Companies that did not even have revenue were in high demand due to the potential for the internet to fundamentally change the way that business, and the world, operated.

As such, the FTSE 100 and the wider stock market were grossly overvalued. This meant that buying shares 20 years ago would equate to investors entering the market at an unfavourable time. As a result, subsequent returns have been disappointing.

A challenging period

Additionally, the FTSE 100 has experienced a major financial crisis in the past two decades alongside the unravelling of the tech bubble. The global financial crisis caused fear among investors, consumers and businesses that produced a halving of the indexs price level.

Although the FTSE 100 has subsequently recovered, it has been an uncertain period for the index that has left it trading on a favourable valuation despite experiencing a decade-long bull market. For example, the FTSE 100 currently has a dividend yield of around 4.3%, while many of its members trade on valuations that are significantly below their long-term averages.

Growth potential

This could mean that investing in FTSE 100 shares today yields higher returns than it has done over the past 20 years. Certainly, there are risks facing the world economy that could cause the index to experience a volatile 2020. However, in many cases, those risks have been priced-in by investors so that the risk/reward opportunity from the index is relatively favourable.

Therefore, while a 130% total return over the past two decades is a disappointment, history shows that the FTSE 100 can deliver superior returns. It surged from 1,000 points to almost 7,000 points in just over 15 years following its inception in 1984. While a similar rate of growth may not necessarily be achievable in the next two decades, the wide margin of safety offered by the index suggests that now could be the right time to buy a range of large-cap shares to boost your long-term financial prospects.

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Warning! I think this FTSE 100 dividend stock could fall 20% in 2020!

If there was an award for the worst-performing FTSE 100 stock of the past decade, Centrica (LSE: CNA) might earn that podium spot.

Since the beginning of 2015,the stock has only lost money for its investors. A 10,000 investment in the company five years ago would be worth just 4,000 today, including reinvested dividends.

By comparison, 10,000 invested in the FTSE 100 since the beginning of 2015 would be worth more than 13,000 today. Thats the difference of 9,000.

Growth struggles

Centricahas struggled to adapt to a changing world over the past 10 years.The owner of British Gas used to be the undisputed utility champion in the UK. However, as consumers shifted away to cheaper peers with better customer service ratings, Centrica has struggled to keep up with its changing market.

The company has issued profit warning after profit warning over the past few years. The latest was in June of last year when management was forced to announce a 58% reduction in its dividend.

To illustrate how quickly the market is changing,the owner of British Gas last 107,000 energy supply accounts in the four months to October. It lost 178,000energysupply accounts in the first half of 2019.

Lack of direction

Centricas biggest problem seems to be a lack of direction. The company once had ambitions to be the UKs largest energy supply and distribution enterprise. But these plans have unravelled over the past few years. The firm has offered up its oil and gas production business for sale and is looking for buyers for stakes in nuclear power plants.

Instead, management has been trying to reposition the group towards customer-facing businesses. So far, these initiatives have failed to make up for the energy supply contract losses and rising deficits at Centricas Connected Home business.

Connected Homeadjusted operating losses increased to 49m in the first half of 2019, from 44min the first half of 2018.

Dividend pressure

All of the above implies Centrica is going to struggle to maintain its current dividend. City analysts expect the company to report earnings of 7p per share for 2019, leaving the current distribution of 5p per share barely covered.

If management is forced to reduce the payout further, the stock could drop by as much as 20% from current levels. Increasing dividend cover to two times implies a payout of 3.5p, or a dividend yield of 3.9% on the current share price.

Historically, Centricasdividend yield has averaged around 5%.This would imply a share price of 70p,22% below current levels.

Considering all of the risks facing Centrica, it could be difficult for the stock to generate a positive return in 2020. A dividend cut, or further earnings reduction, would lead to substantial declines from current levels, implying theres further pain ahead for the stock over the next 12 months.

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Femi Ogunshakin Managing Director
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