Warren Buffett is not an income investor, but he does earn billions in passive income every year. 

So how does he do it? How has the Oracle of Omaha been able to build a passive income portfolio without concentrating on generating income? 

The answer to this question is both relatively simple and quite complicated. He has always focused on buying companies that produce large amounts of income with substantial profit margins. He is also looking for companies that have a strong track record of returning lots of cash to investors. This does not necessarily mean he is looking for high dividend stocks.

Instead, Buffett tends to look for companies that return a large percentage of their cash flow to investors. This can be a sign that management teams will increase their company’s dividends steadily.  

Warren Buffett and dividend investing 

One of the most outstanding examples of this strategy in action is the Oracle’s investment in Coca-Cola. When he first bought this investment in the late 1980s, the stock offered a dividend yield of around 3%.

Today, the stock pays a dividend equivalent to 50% of that initial investment. There has also been capital growth along the way. 

I am trying to follow this approach when building my own portfolio. Rather than looking for the highest yielding stocks on the market, I am looking for companies that have the potential to grow their dividend steadily over the next five, 10, and even 20 years. 

Passive income buys 

A couple of companies appear to me to have these sorts of qualities. Two companies, in particular, are the drinks giant Diageo and distribution group Bunzl.

Both of these firms yield less than 3% at present, but they have excellent growth track records. Going forward, it looks as if this trend will continue. Diageo is projecting steady profit growth over the next couple of years as it expands its market share and its presence in the premium drinks market.

Meanwhile, Bunzl is targeting a series of additional acquisitions to help boost sales growth. As these companies invest in growth, I think they will also be able to return more cash to investors with dividends. They could encounter challenges along the way, such as the supply chain crisis and higher costs due to inflation. These challenges could hit growth. Still, I would buy both for my portfolio today considering their potential as income investments. 

While Warren Buffett does not own any high-profile UK shares, I believe that I can earn a passive income from UK equities by following his approach. Another strategy would be to acquire some of his investments in the US for my portfolio. That is something I will also be considering in my search for income. 

By concentrating on high-quality companies that have a track record of returning lots of cash to investors, I believe I can earn a passive income from my portfolio for life. 

Rupert Hargreaves owns Diageo. The Motley Fool UK has recommended Bunzl and Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The price of Bitcoin when measured against other currencies was volatile in 2021. And 2022 is shaping up to be the same for the cryptocurrency. Yet some investors see Bitcoin as a safe-haven play in times of economic uncertainty. For the record, I’m not one of them. Instead, I’m focusing on stocks to buy now.

Bitcoin could do well in the coming years, but I reckon there’s a big opportunity developing in the stock market right now. And my strategy involves a two-pronged approach to the markets. Geopolitical events are causing many stocks to fall in price. And that situation brings with it both opportunities and setbacks.

Holding my nerve

On the one hand, shares I already own have been moving lower. So the first thing to consider is what to do about them. And my tactic involves re-appraising the underlying businesses and their long-term growth opportunities.

In most cases, my decision will be to simply hold on tight and ride out the current bout of market uncertainty. And that’s because many will have operations that are unaffected by the recent troubles in Eastern Europe. And others will have the potential to recover from any setback.

It may feel uncomfortable to watch the value of a portfolio decline. But I must accept that reversals, setbacks, bear markets and corrections are all part of the deal when investing for the long term. As long as I’ve chosen shares backed by strong and growing businesses, shorter-term challenges should not deter me from long-term investment objectives.

However, on the other hand, shorter-term market movement can throw up opportunities. And that happened in 2020 when coronavirus first hit the markets. Stock prices plunged. And in many cases, share prices moved so low they understated the true value of their underlying businesses.

Hunting for keen valuations

Indeed, shorter-term market movements can end up exaggerating the true extent of changes in business fundamentals. And that can happen on the upside and on the downside.

But when stock prices overshoot to the downside and valuations become depressed, that’s the time to pounce on the stocks of strong businesses. The technique has been used by billionaire investor Warren Buffett to good effect over several decades, for example.

And buying stocks when they’re undervaluing businesses can lead to strong investment returns in the future. Shareholders stand to gain from a valuation normalising back upwards and from the ongoing operational progress of the business.

Sometimes, gains can be rapid, as we saw following the spring crash of 2020. But that doesn’t always happen. And sometimes businesses don’t recover from setbacks. All shares carry risks and positive investment returns are not guaranteed for shareholders in any company.

But despite the risks involved in share ownership, the stock market has a good long-term record. And I’m keen to pick up stock bargains now. For example, I’ve got my eye on fast-moving consumer goods company Unilever. And I’m watching premium alcoholic drinks supplier Diageo and healthcare giant GlaxoSmithKline.

However, these stocks are not certain to deliver positive returns for me in the coming years. Nevertheless, they’re on my watchlist. And I’ll likely pounce and buy some of their shares during the current period of market weakness. 

The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo, GlaxoSmithKline, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I am looking for cheap FTSE 250 shares to buy today for my portfolio following the recent market volatility. 

There are three companies that really stand out to me as being undervalued growth stocks right now. I would add all of them to my portfolio. 

FTSE 250 shares to buy

The first company on my list is the food group Premier Foods (LSE: PFD). At the time of writing, the stock is trading at a forward price-to-earnings (P/E) multiple of 8.3. However, analysts think the business will report earnings growth of around 17% in 2022. On that basis, I think the stock is undervalued. 

Some challenges it could face going forward include higher ingredients costs. These could put pressure on the company’s profit margins and slow growth.

Still, after around a decade of restructuring its balance sheet, cutting costs and expanding into new markets, I think the establishment has tremendous potential over the following 10 years as it embarks on its next stage of growth.

Management is investing heavily in marketing and infrastructure to help expand its footprint and reach new consumers. This is not reflected in the company’s current valuation. 

Growing in a niche

Financial services group Close Brothers (LSE: CBG) provides lending and wealth management services to a select group of customers.

It has a strong reputation with its clients, which has helped it grow steadily over the past five years. Revenues have increased at a compound annual rate of 7% per annum since 2016. Going forward, the company is looking to capitalise on this. It should also benefit from rising interest rates.

That said, the business is exposed to the UK economic environment. Therefore, if the economy slows substantially, revenues may come under pressure. 

Despite this risk, I think the stock looks undervalued compared to the group’s potential and niche operating model. The shares are selling a forward P/E of 8.7 and offer a dividend yield of 5.8%. Once again, I think this valuation undervalues the company’s competitive strengths and growth potential. 

Trading growth

Financial services group Plus500 (LSE: PLUS) specialises in offering trading services to retail clients. It should benefit from the current stock market volatility as it takes a tiny slice of each trade.

Despite its competitive advantages and position in the market, shares in the company are selling at a forward P/E of just 8.1. I think this significantly undervalues the FTSE 250 retail trading giant.

The stock also offers a dividend yield of 4.9% and management has been returning cash to investors by repurchasing shares over the past couple of years. 

Some of the main challenges the company may encounter going forward include regulatory risks and competition. The market is highly competitive, and complying with regulatory requirements can be expensive. 

Even after considering these challenges, I think the stock looks incredibly undervalued.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It’s not been a great start to 2022. After what was generally a good 2021 for stocks, worries about rising interest rates and now a dangerous geopolitical situation has sent shivers through global stock markets. Over in the US, the flagship S&P 500 index has seen a fall of around 9% year to date, compared to an increase of over 25% last year. However, here’s why I think that Vanguard S&P 500 ETF (LSE: VUSA) is still one of the best exchange-traded funds (ETFs) to invest in right now.

Selecting an ETF for my own portfolio

There are a lot of choices when it comes to S&P 500 funds, offered by most if not all of the large investment companies. The largest one listed in the UK is iShares Core S&P 500 UCITS ETF with a size of over £40bn. The cheapest one is Invesco S&P 500 UCITS ETF with an ongoing charge of 0.05%.

For my own portfolio I’ve chosen VUSA, as this seems to sit in the middle in terms of size ($38bn) and costs (0.07%). It also pays a dividend, which is currently 1.12%.

Tracking the flagship US index means the ETF contains all 500 companies, which are selected by a committee. Firms must have a big enough market cap, have at least 10% of shares outstanding, and meet liquidity and profitability requirements. It includes big-name companies such as Microsoft, Apple, and Amazon and spans a variety of sectors such as technology, retailers, and banking.

One downside is that the ETF only includes companies from the US. It’s true that many of these firms derive some of their earnings from outside of that country, but this percentage has been falling over time.

Another issue with buying the S&P 500 is that I limit my returns to those of the index. I could be wrong, but by picking individual stocks I might be able to outperform it.

However, this ETF allows me to invest in 500 companies by holding a single share. For me, it’s a low-cost way of diversifying massively across companies and sectors. I’m happy to forgo the possibility of a higher return from investing in individual companies for the ease of this diversification.

Why VUSA is still one of my top picks

As the famous saying goes, ‘It’s tough to make predictions, especially about the future’ and I think this is particularly apt for 2022. No one can say for sure the course of inflation, interest rates, or the Russia-Ukraine conflict.

Stocks go up and down and it’s possible that over the next few months some of the companies in this ETF might take a hit. However, over the long run they’re very likely to recover. This is because of the S&P 500’s selection criteria. In essence, they must be fundamentally solid with a long history of earning positive average returns.

The S&P 500 has been around for decades, has proved enormously resilient and has averaged around 10% returns per year since 1957. Though there are no guarantees, I’m hopeful in the future we might see similar long-term performance. If so, this fund will see a good return.

This is why Vanguard S&P 500 ETF is one of my top ETF picks to stay on course during turbulent times. I’m happy to continue to include it among my holdings as part of a balanced portfolio.

Niki Jerath owns shares in Vanguard S&P 500 ETF. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon, Apple, and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

If I had to select the best shares to buy now to invest a lump sum of £5,000, I would focus on companies in the resource and engineering sectors. 

I think these sectors are set to benefit most from the global economic recovery over the next few years. While geopolitical tensions may lead to some uncertainty over the next couple of months, I think the long-term outlook for these industries is exciting. 

Indeed, some companies like Rio Tinto (LSE: RIO) are currently benefiting from what I can only call a Goldilocks environment.

Best shares to buy now for growth and income 

The price of the company’s main product, iron ore, is trading at a multi-year high. This is only part of the equation. For the past decade, the organisation has been trying to reduce its operating costs and pay down debt. The combination of these initiatives as well as the higher iron ore price, has helped the firm generate record profits. 

I believe these trends will persist for some time. By investing in automation and other efficiency initiatives, the company can keep costs down. The iron ore price is unlikely to remain high forever, but I think the cost of this crucial commodity will remain elevated as the world tries to rebuild from the pandemic. 

Rio is one company I would buy for my £5,000 portfolio. I think the engineering group Weir (LSE: WEIR) also deserves a place on my list of the best shares to buy now. 

This engineering enterprise supplies critical components to the mining, oil, and gas sectors. Due to the essential nature of these products, it is unlikely customers will try to shop elsewhere to reduce costs. This gives the corporation a competitive advantage, in my opinion. 

As mining outfits like Rio ramp up production to meet rising demand, they will need to invest in their production facilities. They will need to maintain and enhance facilities’ capabilities. This suggests Weir’s growth potential over the next couple of years is pretty strong. 

Challenges and opportunities 

Despite their attractive qualities, these companies will both face some challenges as we advance. Economic disruption and supply chain issues could push up prices. They may not be able to pass all of these price hikes on to consumers. Further, commodity prices can be incredibly volatile. If they suddenly fall off a cliff, these firms may suffer a decline in profitability. 

Even after taking these headwinds into account, I believe these are some of the best shares for me to buy now in the mining and engineering sectors. There are other opportunities, of course. Rio’s peer, Anglo American, exhibits similar qualities to the iron ore giant.

Nevertheless, I believe these two businesses are some of the best corporations in the most exciting sectors I could own right now. As the world rebuilds over the next five to 10 years, I think these two companies should be able to capitalise on the rebound.

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Weir. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Lloyds Banking Group (LSE: LLOY) continues to plummet as macroeconomic and geopolitical worries have worsened. In just six weeks the Lloyds share price has lost a whopping 21% of its value.

Investors have heavily sold Lloyds on gobsmacking inflationary news in the UK and concerns over how the tragedy in Ukraine will play out. The LLOY share price has dropped to its cheapest since September 2021, below 43p. And more weakness could be around the corner as fears surrounding the macroeconomic and geopolitical situation mount.

Too cheap to miss?

That being said, could the Lloyds share price now be too cheap for me to miss? Okay, City analysts think earnings at the FTSE 100 bank will drop 16% year on year in 2022. But this means Lloyds trades on a forward price-to-earnings (P/E) ratio of 6.8 times. As a long-term investor, this sort of reading looks very attractive.

On top of this, Lloyds is expected to continue raising dividends in 2022 despite this predicted profits fall. And current estimates, combined with those recent share price falls mean the bank boasts a whopping 5.9% dividend yield. This beats the 3.6% forward average by a huge margin.

Rising rates

Of course buying any UK share involves the weighing up of potential risks versus possible rewards. And some may argue that the recent falls in Lloyds’ share price fairly reflects the rising threats to the British and global economies.

I certainly feel that there’s reason to be optimistic for the Black Horse Bank. The LLOY share price failed to ignite during the 2010s as rock-bottom interest rates harmed profits. It explains why Lloyds continues to trade at a huge discount to the 275p which it traded at just before the October 2007 stock market crash.

However, the profits Lloyds makes from its lending activities could finally be about to rebound as the Bank of England aggressively raises rates. Policymakers have hiked the benchmark rate twice in as many months to current levels of 0.5%. Right now the smart money seems to be on interest rates hitting 1.25% by the end of the year, the highest since 2009.

Dangers to Lloyds’ share price

Its critical to remember though that soaring inflation isn’t all good news to Lloyds and its peers. The impact of rocketing prices on the domestic economy could well offset the positive effect of higher interest rates. Indeed, the British Chambers of Commerce now expects economic growth to halve in 2022 as high inflation reigns. Economically-sensitive shares like banks could struggle badly in this environment.

I also worry for Lloyds as the competition from challenger banks like Monzo and Starling intensifies. These digital-led banks are leaving the established banks behind in terms of customer satisfaction. And they are also rapidly expanding their range of financial products to keep the likes of Lloyds on the back foot.

I won’t argue that the Lloyds share price looks ultra cheap. However, in my opinion this is because the bank faces colossal pressure to get back to its glory days. I think the LLOY share price could remain under pressure and would buy other cheap FTSE 100 shares instead.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The FTSE 100 started the year well. Global investors finally woke up to the opportunities on the blue-chip benchmark index after years when their attention was elsewhere. I think they shouldn’t have left it so long — the opportunities were there all along.

The FTSE 100 is still up 9.77% over the last year, despite crashing on Friday, when the index fell almost 3% to near the 7,000 mark.

It is hardly surprising that UK shares crashed, given the impact of the Russian invasion of Ukraine on the global economy. We have been plunged back into a terrifying world we thought we had left behind, and fear and uncertainty is rife.

FTSE 100 looks a buy to me

At times like these, it is tempting to shun the stock market altogether. I’ve been caught up in the general sense of dread and panic myself, but have resisted the temptation to sell. I am still 10-15 years away from retirement, and I hope that gives me long enough to recover from the next market crash (and the next one, and the next…).

I’ve stood by my portfolio of FTSE 100 shares through the dot.com crash, 9/11 attacks, financial crisis, Covid pandemic, and now war in Ukraine. I’m ignoring doomsayers saying that people should pile into cash and gold, and holding my course.

I will also top up my holdings in UK shares from time to time. The FTSE 100 still looks pretty good value to me, trading at a price/earnings ratio of 14.82. The S&P 500 currently trades at more than double that, with a Shiller P/E of 35.18. It seems overvalued to me.

One reason the FTSE 100 has underperformed the US over the last decade is that it does not have the same exposure to fast-growing technology stocks. However, that sector now looks played out, whereas defensive, value stocks are swinging back into favour. I’m thinking of the banks, oil majors, mining companies, and insurers. The UK has plenty of those.

I fancy Barclays and Lloyds Banking Group, Shell, Rio Tinto, and Anglo American, and two old favourites Aviva and Legal & General Group. They may not be the most exciting stocks in the world, but they look strangely reassuring right now.

I’m backing UK shares

I will look to buy more FTSE 100 shares when I can, while accepting that any of my stock picks could crash if the political situation gets even worse. If it does, I may screw up my courage take the opportunity to pick up a few more of my favourite companies. Again, my aim is to hold for the long, long term.

The FTSE 100 is currently expected to yield 4.1% in 2022. That’s a terrific rate of income, at a time when a best buy easy access savings account pays around 0.60% a year. And of course it should rise over time, as companies increase their dividends. That’s why I’m standing by it, through thick and thin.

Harvey Jones doesn’t hold any of the shares mentioned in this article. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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