I can barely remember my first job (delivering pizza), not to mention the meagre wage I was on. What does come to mind is that my income hardly even covered my petrol costs… and that I didn’t stick around for too long. But 20 years on, and I’m generating more in passive income than my pizza delivery salary. The best part is, I don’t have to spend any of the income on petrol either. If I was to start again today, these are the investments I would make to generate £5,000 in passive income each year. Let’s take a look.

Passive income from the stock market

As far as generating passive income goes, I think the stock market is an excellent option. Options like buy-to-let properties and side hustles are valid too, but I don’t think they’re truly passive income streams.

This is where the stock market has a major benefit. If I buy shares of a company that’s generating a profit each year and paying a dividend, I get a small slice of the cash it was generating. So today, I buy dividend stocks to earn passive income. If my portfolio value was £100,000, then I’d need a 5% dividend yield to earn £5,000 in passive income each year.

Dividend stocks

My aim is to generate at least a 5% dividend yield, but also diversify my portfolio. Dividends are never guaranteed, and depend on the profitability of the companies. Therefore, if I was starting today, I’d spread my investments over different sectors.

I’d buy shares in Rio Tinto, the global mining company. The current dividend yield forecast is 9%, which is far higher than my target. Commodity prices can be volatile though, so my dividend stream would also likely fluctuate in value.

I’d also buy shares of housebuilder Persimmon. It has a mighty dividend yield of almost 10% for 2022. I’d need to keep in mind that the housing market could slow. Nevertheless, the dividend yield is big enough for me to compensate for this risk.

I think the financial services sector is also a great place to look for passive income. I’d buy companies such as Legal & General and M&G. Both have expected dividend yields of over 7% for this year. I’d be diversified across asset management and insurance businesses too. However, if the stock market crashed, then the assets that these companies manage would fall in value.

One final dividend stock I’d buy is British American Tobacco. Its dividend yield forecast is 7%, so above my 5% threshold again. The core tobacco business will likely be in structural decline from here, but the company is diversifying into non-combustible products.

Final thoughts

All of these companies offer dividend yields way above my 5% target. Therefore, I’d be generating more than an annual £5,000 passive income stream. But they come with risks too, of course, so that’s not guaranteed. But it’s comforting to think that if I could buy dividend stocks with at least a 7% dividend yield, I’d only need a portfolio value of £71,000 to generate my £5,000 passive income target.

It’s always a balance of risk and reward. But  I think these companies will carry on paying dividends at these high yields, so I’d buy the shares in my portfolio to achieve my £5,000 annual passive income.

Dan Appleby owns shares of Rio Tinto, Legal & General and British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.

In the middle of October 2020, I wrote an article claiming that with the BP (LSE: BP) share price trading at a near 25-year low, the stock looked cheap. 

As it turns out, my call was a bit premature. When my article was published on the 17th of October, the stock was trading around 210p. Over the following week, it fell further, declining below 200p. 

However, after falling below 200p, the BP share price quickly recovered. Since then, shares in the oil giant half rebounded by more than 100%.

Including dividends, the stock has returned around 110% since my article was published in October 2020. 

The outlook for the BP share price 

Unfortunately, I did not follow my own advice for personal financial reasons. If I had, I would be sitting on a substantial return. The good news is, I do not think I am too late for the party. Even though the BP share price has added more than 100% over the past year and a half, I think the stock can continue to push higher. 

As geopolitical tensions send the price of oil surging, City analysts have rushed to revise their earnings forecasts for the company over the next two years. According to analysts projections, the corporation is set to earn an average net profit of $14bn per annum for the next two years.

Based on these estimates, the shares are trading at a 2023 price-to-earnings (P/E) multiple of 7.4. The stock also offers a dividend yield of 4.1%. Considering its earnings forecasts and strong balance sheet, it looks as if the company has plenty of room to hike cash returns for shareholders over the next few years.

I do not want to speculate too much on how much the enterprise can return to investors. After all, this is going to be a variable figure. Oil prices can be incredibly volatile. If the price of the black gold suddenly falls 50% in a few weeks, the outlook for the BP share price will change dramatically. 

This is probably the most considerable risk of investing in companies like BP. Still, as the current environment proves, volatility can be a double-edged sword. 

The green transition 

As a long-term investor, I am not going to try and predict what will happen to the price of oil over the next few weeks, months or even the next year. What I am really excited about is how the company’s current windfall will help BP accelerate its green transition. 

Last year the organisation set out plans to increase renewable energy investment and carbon emissions over the next couple of decades. With profits rising, management has revisited these targets. The group now plans to half its operational emissions by 2030.

It was previously planning a 30% to 35% reduction by this date. It is also looking to ramp up spending on green technologies by 40% within the next three years. Management is confident that the enterprise will hit its target of developing 20 gigawatts (GW) renewable power capacity by 2025 and 50 GW by 2030. 

Based on these targets and the company’s current valuation, I think the BP share price remains an attractive investment. It also looks to me to be a relatively inexpensive way to build exposure to the green energy transition. That is why I would continue to buy the stock for my portfolio. 

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.

Key points

• A recent trading update shows profit increased five-fold
• easyJet’s passenger capacity and load factor are quickly rising
• More countries are fully reopening their borders without testing or vaccination rules

easyJet (LSE: EZJ) is one of the leaders in the airline industry. Based in the UK, it operates short-haul flights to Europe and North Africa. Like many of its peers, it has not escaped the battering of the Covid-19 pandemic. With the less severe Omicron variant, however, it seems likely that international travel may return to almost pre-pandemic normality. This could have a positive impact on the easyJet share price. Let’s take a closer look.

Encouraging year-on-year results

The firm’s recent trading statement for the three months to 31 December 2021 was something to celebrate. During this period, revenue stood at £805m. This is nearly five times the figure for the same period in 2020, which was only £165m.

Similarly, while the company still reported a loss, it had almost halved. The loss had shrunk from £423m to only £213m. This suggests that the business is largely through the worst of the pandemic. I hope this is soon reflected in the easyJet share price.

Other important metrics for gauging recovery in the airline industry are passenger capacity and load factor, because this shows how many people are flying. For the period, easyJet flew 85,618 flights. This included a load factor of 77%.

A year-on-year comparison reveals that the number of flights for that time in 2020 was only 23,428 with a load factor of just 66%. This marks a significant increase and is a strong indication that the easyJet share price may be approaching clearer skies.  

Open borders

Recently, many countries have started the process of reopening borders. Some are even removing testing requirements and vaccination requirements. Sweden has stated that it will permit smooth travel for all EU citizens. Furthermore, Norway is going a step further and reopening for tourists from all around the world.

They might soon be joined by Switzerland. The Swiss Federal Council is in the final stages of consultation that would see all passenger restrictions dropped. A decision is due on 16 February. If these moves come to fruition, I can only see the easyJet share price going up.  

There is, however, always the risk of further variants arising. This could delay a return to normal international travel. Nonetheless, S&P Ratings has upgraded the firm “on expectations that European airline traffic was set to continue recovering over the course of 2022”. 

The global recovery may do great things to the easyJet share price. With more planes in the sky, the firm will enjoy greater revenue. I fully expect more countries to follow Norway and others, with a return to normal travel in the near term. I will be buying easyJet shares without delay.

Andrew Woods 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.

The Tesco (LSE: TSCO) share price has held up well this year as stock markets have been volatile. The stock is up 2.5% so far in 2022. However, over one year, the share price is down by 2.5%.

I think the stock can keep rising from here though. I’ve been impressed by Tesco’s strategy and improving fundamentals. Let’s take a look.

A rising Tesco share price

The pandemic has had a major impact on shopping habits. It’s meant consumers are ordering far more online nowadays, including home delivery of groceries.

Tesco is leading the way in this shopping channel relative to its competitors. In fact, Tesco almost doubled its online delivery capacity during the pandemic. According to a recent trading update for the 19 weeks ended 8 January, the company said it had the highest total market share in four years. This included online shopping where it continues to grow relative to its competitors.

The company has been innovating in this channel, too. Its Tesco Whoosh initiative is targeting superfast home delivery, which is now in more than 100 stores. Tesco is showing it can compete with the likes of smaller start-up companies in this area, such as Getir, even though it’s an almost £23bn company and member of the FTSE 100!

Financial trends and earnings are improving, too. In the recent trading update, both one-year and two-year like-for-like sales were positive across the UK and Central Europe. This meant Tesco upgraded its retail operating profit above the top-end of its previous expectations.

For the full-year to 28 February, City analysts now forecast operating profit growth of 25%. If this growth is achieved, the shares would be valued on a price-to-earnings ratio of 14. This isn’t particularly high, especially if the company keeps growing market share and earnings.

Risks to consider

Food retailing is a highly competitive market, with little in the way of differentiation between the businesses themselves. For instance, Tesco, Asda and Sainsbury’s are largely the same and simply compete on price.

Tesco also failed in its wider international expansion because it had no lasting advantage against other brands. It sold its Polish business, and exited Thailand and Malaysia. These aggressive expansion plans did lead to debt issues for the company, which have now been largely resolved. Nevertheless, it is something to monitor if Tesco embarks on similar plans in the future.

Should I buy Tesco shares

If I was to buy Tesco shares, it would primarily be for its income potential. Indeed, the cash flow generation forecasts for the company are excellent in the years ahead. In fact, analysts are expecting over £1.8bn in free cash flow for the next three years. This would be an annual free cash flow yield of 8% based on Tesco’s market value today.

Because of this cash generation potential, I’m expecting the dividend to rise in the years ahead. Not only this, but Tesco could well start a share buyback scheme. This would boost earnings per share, and hence the share price should also keep rising. So, today, I’d consider adding Tesco shares to my portfolio.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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 sell-off in global markets in 2022 so far has caused panic among traders. For me, however, it’s simply been an opportunity to snap up stock in what I think is one of the best investment trusts around.

My latest investment trust buy

The latest addition to my Self-Invested Personal Pension is Montanaro European Smaller Companies Trust (LSE: MTE). Allow me to explain why.

If I’m to seriously grow my wealth, I arguably need to have some exposure to small-cap stocks. Minnows have the potential to grow at a faster clip than market giants, compounding my money at a fast rate. The best bit is that smaller companies aren’t heavily followed, regardless of their quality. That makes for a fertile hunting ground for managers like MTE’s George Cooke.  

The trust’s track record speaks for itself. MTE achieved a 32.8% return in 2021. Unsurprisingly, this thrashed the still-very-respectable 15% of its benchmark. Personally, I think this performance justifies the undeniably steep 1.2% ongoing charge. 

Unfortunately, this performance has reversed in 2022 so far. The share price has fallen 23% year-to-date as I type. That screams ‘opportunity’ to me. 

What’s in the fund?

MTE’s biggest holdings are circuit board producer NCAB, software provider Esker and business applications supplier Fortnox. Interestingly, the trust has almost a third of its assets invested in Swedish companies. German businesses represent 15% of the portfolio with France, Switzerland and Italy taking up roughly 10% each.

Another thing worth noting is just how many (or few) businesses make up the portfolio. Based on its most recent factsheet, MTE comprises just 57 holdings. That’s fairly concentrated for an investment trust that’s focused on the lower end of the market spectrum.

Worth the risk?

So, what might go wrong from here?

Obviously, there’s a possibility that the price of this investment trust may continue falling in 2022. A stuttering post-pandemic economic recovery or a dash to safety due to interest rate rises could shake out more investors. And the crisis on the Russia-Ukraine border won’t exactly attract capital to the region. Even if the markets do recover quickly from this year’s wobble, there’s no guarantee that European stocks will keep up with other parts of the world either. 

More generally, the Montanaro European Smaller Companies Trust may struggle to repeat its stellar returns going forward. Since smaller companies are inherently less liquid (harder to buy and sell), MTE’s share price could be more volatile too. 

Long term focus

To mitigate this risk, I’ve kept some powder dry with the intention of adding to my holding further down the line. Of course, there’s the potential for this to backfire if the MTE’s share price rises from here. However, it’s psychologically much easier for me to build a position in tranches rather than go all-in from the outset.  

Another thing I’ve done is to stay diversified. This includes staying invested in other funds, such as FTSE 100-listed Scottish Mortgage Investment Trust. There’s no overlap in holdings between this and the small-cap fund. 

Last, I’ve also been reminding myself that this is intended to be something I retain for years and possibly decades. Having this time horizon means there’s little point in me getting too worried about market moves of the kind we’re seeing right now.

Paul Summers owns shares in Montanaro European Smaller Companies Trust and Scottish Mortgage Investment Trust. 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 was a big week for financial markets just gone. The reason is simple on the surface: inflation. It’s the key risk for investors like myself this year. And I think it could very well lead to a stock market crash. Not to mention prominent investors calling out that there’s a ‘superbubble’ right now! It’s in stark contrast to the huge returns that stock markets achieved after the Covid crash from March 2020.

So here, I’m going to look at the key risk as I see it today. Then, analyse whether I could still buy cheap UK shares if a stock market crash does happen.

A major risk: inflation

It was fresh inflation data from the US last week that spooked markets. The Consumer Price Index (CPI) came in at 7.5% year-over-year for January. This was more than forecast, and an increase from the 7% reading for December. The large-cap S&P 500 index was up for the week before the CPI release, but fell 3.7% to end Friday after the announcement.

Inflation is clearly spooking stock markets right now. And for good reason. It was all the way back in 1982 the last time US CPI rose so quickly. But why does high inflation really matter for the stock market? Well, it can erode company profits and raise costs. It can also dampen consumer sentiment, which impacts sales.

There’s another factor, though. And it’s what a central bank will do to try and curtail price rises. For example, the Federal Reserve (the US central bank) is expected to raise interest rates at least four times this year. In fact, the last time CPI was 7.5% in 1982, the Federal Reserve’s interest rate was 15%! That’s a lot higher than the 0.25% today, and gives huge scope for aggressive interest rate rises this year. This generally leads to a slowdown in economic growth and falling asset prices.

It’s not all about the US either. The UK CPI rate is expected to reach a peak of 5.8% this year. The Bank of England has already raised interest rates twice since December, too.

Here’s what I’d do if we see a stock market crash

But as a long-term investor, I’m not worrying too much. In fact, if a stock market crash does happen, it could throw up some excellent bargains for my portfolio. As an example, I’ve got Microsoft on my watchlist to buy if the share price falls.

The UK market is also far cheaper than the US right now. For example, on a forward price-to-earnings ratio, the FTSE 100 is valued on a multiple of 12, whereas the S&P 500 is trading on a much higher ratio of 20. Therefore, I see far more likelihood of a stock market crash in the US large-cap index when compared to the UK equivalent.

Nevertheless, if the UK stock market does crash, I’ll look for bargain shares. Companies like Segro and YouGov look richly valued today, but could be compelling buys for my portfolio if we see a crash. Just as long as I’ve thoroughly researched the companies before I bought any shares, I’ll be comfortable shopping for bargains.

Dan Appleby has no position in any of the shares mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended 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.

I think the best stocks to buy now in the FTSE 100 are resource companies. There are three reasons why I would focus on these businesses. 

First of all, countries worldwide are spending heavily to stimulate their economies after the pandemic. This is causing a surge in demand for essential commodities such as iron ore and copper. 

Secondly, the stockpiles of these resources are running low. After the disruption of the pandemic, companies have not been able to keep up with the spike in demand. 

And third, commodity prices tend to provide a good hedge against inflation. 

The best stocks to buy now 

All of these factors suggest that the path of least resistance for commodity prices over the next few years is upwards. This could be the perfect environment for companies like Rio Tinto, BHP, and Glencore. 

BHP and Rio are particularly well-positioned to capitalise on this environment. They are some of the largest mining companies in the world. As a result, they have some of the lowest operating costs and largest economies of scale. They can both produce iron ore for less than $20 per tonne. The price of iron ore at the time of writing is $150 per tonne. 

These figures illustrate just how profitable these businesses can be in the current environment. There are other costs to consider, such as energy, staffing and repairing machines. All of these are currently going up. Higher operational costs will almost certainly eat into these companies’ profit margins, but rising commodity prices should almost certainly offset some of the additional costs. 

Another challenge these companies may have to take into account is volatility. Commodity prices can be incredibly unstable. Just because prices are rising today, does not mean they will continue to do so indefinitely. 

I believe Glencore is one of the best stocks to buy now for another reason. As well as benefiting from rising commodity prices, the world’s largest commodity trading house should also be able to capitalise on economic disruption. Its vast network of ships, ports, pipelines and trucks enables the firm to get commodities to where customers need them.

Considering its international scale, the corporation can charge a premium for these services. Its vertical integration also adds an edge. Being able to produce, sell and distribute commodities is a competitive advantage available to few of the company’s peers. 

FTSE 100 giants 

I also believe these are some of the best stocks to buy now in the FTSE 100 because they have relatively strong balance sheets. Mining companies have spent the past couple of years reducing debt and paring back needless capital spending.

This means they are incredibly well-positioned to capitalise on the current boom and have the flexibility to return significant amounts of cash to investors. Indeed, based on current analysts estimates, shares in BHP could yield 11% this year, Rio could yield 13% and Glencore, 4.3%. 

As such, based on all of the above, I would be happy to buy Rio, BHP and Glencore for my portfolio today. I think the tailwinds outlined above could help these companies outperform in the years ahead. 

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.

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The appeal of passive income means that people come up with all sorts of wacky ideas to try and generate it. I prefer a simple, conventional one: investing in dividend shares. By buying shares in some large, successful companies, I hope to share in their good fortune when they pay dividends.

That can work on a small or large scale. Here is how I would use this approach to target £10,000 a year in passive income, for example.

Setting a target

£10,000 a year is a sizeable chunk of passive income. So it will take quite a bit of capital to generate. If I can invest in shares with a 5% yield – that means the dividend amounts to 5% of the current purchase price – I would need to invest £200,000. That is a lot of money, although it would hopefully set me up with an annual £10,000 passive income stream.

An alternative would be to start with a smaller sum and contribute regularly. That would take me more time to hit my annual income target of £10,000. But it would allow me to work up to it gradually with whatever money I could afford.

Finding the right dividend shares for me

One temptation I would avoid is investing in higher-yielding dividend shares purely so I could aim for the same target with less capital.

Higher yields on shares often indicate higher risks. For example, at the moment mining firms Rio Tinto, Evraz, and Ferrexpo all have yields of 8% or more. In fact, after a plunge in its share price today, Evraz yields an incredible 23%! But clearly there are risks in mining, with some commodity prices near record highs. Mining is a cyclical market, so in future, prices are likely to fall again and so are dividends.

But if I do not just hunt for high yields, how do I select shares for my portfolio? Basically a dividend is a way for a company to distribute free cash flows its business has generated to shareholders. So, I look for companies with sustainable competitive advantages I think it can use to generate substantial cash flows to support future dividends. If shares offer high yields that could be good for my passive income streams – but I do not look just for high yields. 

Investing for passive income

Once I have found such shares, I would buy them for my portfolio. To reduce my risk, I would diversify across different companies and business areas. For example, I like both Imperial Brands and British American Tobacco as passive income ideas for my portfolio. But both are tobacco companies, so face similar risks such as declining revenues as people stop smoking.

If I was investing £200,000 across 20 shares I might find owning two tobacco shares to be within my risk tolerance. But if I was only buying shares in five or six different companies, for example, I would not want to concentrate my risk that much.

Having identified the diversified set of shares I want, I would buy them then sit back and wait hoping for my passive income to start piling up. It really is that simple!

Christopher Ruane owns shares in British American Tobacco and Imperial Brands. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. 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 term ‘metaverse’ has been bandied about a lot recently. As has the term ‘metaverse stocks.’ Investors are scrambling to get in on the ground floor and attempt to gain big by getting in early. But what are metaverse stocks? Let me explain and provide an example of one I like for my holdings currently.

What are metaverse stocks?

The term metaverse is defined as a three-dimensional world that is accessible to all. It refers to a virtual space that enables social interaction with others, for many purposes such as entertainment or business.

One of the best examples I can think of is when I use my virtual reality (VR) gaming headset and interact with other gamers. This virtual communication occurs in the metaverse.

As well as VR, the metaverse also covers ‘augmented reality.’ This is when the real world and virtual world come together. An example of this is the augmented reality game Pokemon Go from the famous Pokemon franchise. This was a hugely popular game a few years ago.

A metaverse stock is a share in a company that presents, supports, or enables the metaverse.

One metaverse stock I like

The biggest area of growth in the metaverse is thought to be virtual and augmented reality. In order for the metaverse to excel in this and other areas, the quickest and most reliable online network infrastructures are needed. This is why I like Calnex Solutions (LSE:CLX).

Calnex is the world leader in testing and measurement solutions to prove and monitor the performance and reliability of the global telecommunications sector.

Calnex is a new addition to the UK market and I believe it could be a good opportunity to get in early. Other metaverse stocks will be new additions to the market but there will be some established companies diversifying towards this new craze.

As I write, Calnex shares are trading for 121p. At this time last year the shares were trading for 2% less at 118p.

One of the risks with Calnex is that it only listed on the UK market approximately 15 months ago. Its progress since that time has been supported by growth and excellent results. There is a chance that results and growth slows down, affecting the share price and its investment viability.

Calnex has a good track record of performance. I do understand past performance is not a guarantee of the future, however. Looking back, I can see revenue and gross profit have increased year on year for the past four years. Coming up to date, interim results for the six months ending 30 September, released in November, were impressive. Revenues increased by 20% compared to the same period last year. In addition to this, net income increased by 24%. It also reported growth in all its key market segments.

The adoption of 5G and the rise of cloud computing will help firms like Calnex, especially as the need to monitor network reliability will increase. Metaverse stocks will continue to soar in popularity, in my opinion.

At current levels I’d happily add Calnex shares to my holdings and hold them for a long time. I believe they could provide lucrative returns over the longer term, especially as growth increases and the metaverse and its adoption expands.

Jabran Khan 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.