If I gained 1,000% on a £1,000 investment I’d end up with £11,000.

And that may seem like a tough goal to reach. However, the mathematics of the situation means achieving a 1,000% return may not be as difficult as it at first seems.

The power of compounding

I believe that because of the power of the process of compounding. For example, achieving a 100% return would give me £2,000. But if I then repeat the trick and achieve another 100% return on top of what’s gone before, I’d end up with £4,000. And that’s a 300% return over all.

Can you see where this is going? If I achieve one more 100% doubling of my money, the overall sum would be £8,000, and that’s a 700% return over all.

So, compounding means the longer I do it with positive returns, the more the absolute returns accelerate higher. And that’s one of the big secrets of Warren Buffett’s extraordinary returns, for example. In the later years of a period of compounding, the gains can be spectacular.

I’m not pretending it’s easy to gain consecutive 100% returns from stocks. But one of the most important things is to make sure returns are actually positive and that I don’t slip into losing money on stocks. Buffett himself emphasised the importance of not losing with his famous first rule of money management — don’t lose money. And he backed that up with his second rule — never forget rule number one.

Risk-first investing

And I’ve heard it said that the most successful investors are those that approach the process of investing risk first, or defensively. By focusing on protecting the downside risk, the upside almost takes care of itself. The alternative is to shoot for big gains all the time, which often leads to investors coming a cropper and underperforming.

So, my plan to achieve a 1,000% gain on a £1,000 investment would involve taking it slowly but surely. I’d spread my money over several index tracker funds such as those following the FTSE 100, FTSE 250 and small-cap indices. and I’d also invest in trackers following foreign markets such as America’s S&P 500 index and others.

But one of the keys to the plan would be the automatic reinvestment of dividends along the way. So, I’d select the accumulation version of each fund and then sleep well at night knowing I’d done the best I could to make sure compounding is under way in my portfolio.

However, I wouldn’t stop there. One of the key variables in any plan for compounding money is the level of the annualised rate of return. So, I’d aim for higher annualised returns by targeting the shares of individual companies as my portfolio grows in value. All shares carry risks. And such an approach will require more research and monitoring time. But, I think it’s worth the effort for my portfolio.

Kevin Godbold 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.

Renewable energy is a hot sector at the moment. It’s quite a broad category, but mostly focuses on companies involved in wind or solar energy. Electric vehicle stocks also fall into this area. Aside from the potential share price growth in the future, some also offer dividend payments. So as an income investor, here are two renewable energy dividend stocks that have caught my eye and would like to buy.

An ESG-friendly dividend stock

The first company I’m considering is the Renewables Infrastructure Group (LSE:TRIG). The share price has increased by just 0.46% over the past year. However, the business is less focused on share price growth and more on paying out returns to shareholders. This is evident by looking at the dividend yield, currently at 5.13%. 

The fund was launched back in 2013, when renewable energy wasn’t anywhere as near as popular as it is today. It invests in infrastructure projects, mostly onshore and offshore wind farms and solar parks in the UK and Europe. Any surplus cash flow is paid out as dividends. 

As of the update provided last October, TRIG has over 80 projects that it’s invested in currently. This is one of the reasons I like stock. Rather than having all its eggs in one basket, the breadth of projects allows the company to be diversified against any negative news from one specific project.

However, I should be aware that the share price is currently at a 14% premium to the net asset value. The net asset value simply refers to the tangible value of the overall business. The fact that the share price gives a market value higher than this means I’m paying slightly over the odds.

Dividends increasing with inflation

The second renewable energy dividend stock is Greencoat UK Wind (LSE:UKW). The dividend yield is slightly below TRIG, currently at 4.97%. And the share price is up a modest 2.3% over the past year.

As the name suggests, Greencoat specialises in investing in wind farms in the UK. It has over 40 investments at present, ranging from Stroupster in Scotland down to Little Cheyne Court in Kent.

As for the dividends, there’s good news for investors like me who are conscious of high inflation. Greencoat said that “the board has increased and intends to continue to increase the dividend in line with retail price index (RPI) inflation.” This should help me in the future to counterbalance inflation due to dividend growth.

I do need to be aware that the share price is also trading at a premium to the net asset value. Based on the last quarterly valuation, the share price is at a 7.24% premium. In the same manner as TRIG, this is a risk to me investing in this renewable energy dividend stock as I’m potentially paying more than the company is worth. This is one point that legendary investor Warren Buffett cautions against.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Greencoat UK Wind. 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.

Here are three UK shares near the top of my potential buy list right now.

Growing digital sales

Shoe Zone (LSE: SHOE) is a UK-based footwear retailer. The company sells via an estate of some 410 stores nationwide and its website, shoezone.com.

In January, with its full-year results report, the company posted a healthy profit after recording a loss in 2020. And a big growth area has been the 58% increase in digital trading during the period. Online sales generated revenue of £30.5m in the 12 months to 2 October 2021 — just under 26% of total revenue.

The company reckons its decision to invest in infrastructure and people before the pandemic enabled it to capture digital sales when customers buying habits changed. And I see the growth of e-sales as a positive for this business.

However, although revenue and cash flow both have a positive trajectory, earnings have been patchy. And the company isn’t paying shareholder dividends at the moment.

Nevertheless, I’m keen on the stock for its growth potential. And with the share price near 150p, the forward-looking earnings multiple is just below 14 for the trading year to October 2023. I’d describe that valuation as fair and I would aim to buy a few shares on dips and down-days to hold for the long term.

Diversified and growing sales

Harry Potter publisher Bloomsbury Publishing (LSE: BMY) produces academic, educational, fiction and non-fiction publishing for consumers, children, students, teachers, researchers and professionals.

In January’s trading update, the company said it expected revenue for the year ending 28 February to be “comfortably ahead” of the market expectations. And the news on profits was even better with the directors expecting them to be “materially ahead”.

City analysts expect earnings to grow by about 8% in the trading year to February 2023. But estimates are not guaranteed and it’s possible for Bloomsbury to miss its forecasts. However, with the share price near 372p, the forward-looking earnings multiple is just under 17 when set against analysts’ expectations. And the anticipated dividend yield is about 2.6%.

The valuation looks quite full to me. But I like the firm’s quality indicators and its strong balance sheet. For me, Bloomsbury makes an attractive candidate as a long-term hold.

Well-placed to benefit from infrastructure spending

Construction company Galliford Try (LSE: GFRD) operates a cyclical business. And that kind of set-up comes with risks for investors. But I think the firm is well-placed to benefit from infrastructure spending and could see a boom in its business in the coming years.

In January, the company issued an “in-line” trading update and a bullish outlook. The directors reckon Galliford Try is “well-placed to benefit from increasing Government investment in economic and social infrastructure”. And the firm’s pipeline of work with high-quality private sector clients is also “robust”.

City analysts expect earnings to increase by about 18% in the trading year to June 2023. And with the share price near 180p, the forward-looking earnings multiple is just under 11 when set against that forecast. And the anticipated dividend yield is around 3.9%.

I think that valuation looks fair. And I’m also encouraged by the company’s strong balance sheet with its robust net cash position. In conclusion, I’d be happy to make this stock a core holding in my portfolio with a five-year-plus investment horizon in mind.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Bloomsbury Publishing. 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.

International Consolidated Airlines Group (LSE:IAG), along with many companies in the travel sector, has gone through a torrid time over the past few years. As a business that thrives on moving people around the globe, it was hit particularly hard as countries imposed tough entry requirements or outright bans.

IAG is one of the world’s largest airline groups, with a fleet of over 500 aircraft. It’s part of the FTSE 100 index and some of the brands that it owns include British Airways, Iberia and Aer Lingus.

The IAG share price has remained volatile since the start of the pandemic. Its low point came in October 2020 amid much uncertainty surrounding the virus. Despite its share price gaining over 80% since then, it remains 60% below pre-pandemic levels.

Travel conditions 

Travel conditions have started to relax and there seems to be plenty of pent-up demand. Holidaymakers are keen to get away after several years of restrictions. Travel company TUI said recently that holiday bookings this summer were 19% higher than before the pandemic. It specifically pointed to a rise in long-haul trips to the Caribbean and Cape Verde, with entry restrictions less strict than some popular European destinations like Spain.

That sounds encouraging, and should bode well for IAG as long haul makes a significant contribution to sales. In fact, in the third quarter of 2021, long haul accounted for around 60% of passenger revenue for both BA and Iberia. Long-distance flights can be more profitable than shorter ones too. This is mainly due to significant cargo revenues and premium ticket sales.

IAG is the largest airline group operating around the North Atlantic. This makes the US an important market. And the country removed its travel ban in November. Other countries have since followed by relaxing entry requirements and the outlook is encouraging. As such, IAG expects the group to be operating at a big 90% capacity by the summer.

Bear in mind that some countries are likely to take longer to reopen due to stricter quarantine requirements. And although the outlook looks promising, the past few years have shown that Covid is an ever-changing virus. Any resurgence in more dangerous variants could disrupt IAG and the travel industry again.

Also, IAG is still loss-making. In November, it forecast a €3bn operating loss for the year. That said, it’s confident it can return to profitability in the current year.

Does the IAG share price appeal to me?

I won’t be buying IAG shares though. I’m not keen on airlines as I see too much competition and low profitability in general. But that’s not to say that the IAG share price can’t fly. In fact, for the reasons outlined above, I think the share price could do well over the coming months. The general conditions this year really could allow it to take off. But as a long-term investor in high-quality shares, there are plenty of other options that I’d buy instead.

Harshil Patel 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.

Already this year, the Rivian (NASDAQ: RIVN) share price is down 44%. And since its peak at close to $180 back in November, the stock has crashed 68%. Ouch!

It’s been quite a ride for investors, then, since the company listed via an initial public offering (IPO) back in November. In fact, at the time of the IPO, Rivian was valued at $66.5bn, which then rose to $153.3bn in the space of seven days. However, today, the market value has fallen to $52.5bn. To put that into perspective, the loss in Rivian’s market value since November is greater than all but nine of the biggest companies in the FTSE 100.

Which brings me to the question: should I buy the stock now that the share price is far lower? Let’s take a look.

The investment case

Rivian operates in the expanding electric vehicle (EV) industry. Specifically, it designs and manufactures electric vans and pick-up trucks in the US. The growth in this market alone should provide a huge tailwind for Rivian in the years ahead. Indeed, the North American EV market is expected to grow at a compound annual growth rate of 37.2% from 2021 to 2028.

There are some big-name investors backing the company too. For example, Amazon owns over 17% of Rivian shares. Furthermore, Amazon has a contract with Rivian to deliver 100,000 EV vans over the next few years as it looks to electrify its delivery fleet. This is a huge boost of confidence and shows excellent early traction for Rivian’s EVs.

Looking further ahead, and the commercial van segment could be an excellent growth market for it. This targets an area that popular EV maker Tesla doesn’t right now. The shift to online shopping and the need for commercial delivery vans could further boost Rivian’s sales as more e-commerce retailers look to electrify their fleets.

Such sector tailwinds can be seen in Rivian’s revenue forecasts for the years ahead. It’s expected to grow to $3.5bn in 2022, and increase to $8.5bn in 2023. If achieved, this would be a highly impressive growth rate of 145%.

Should I buy at this Rivian share price?

However, I think the volatility in the share price highlights the uncertainties for the company at present, and therefore the risks for me as a potential investor.

One of these uncertainties is the potential for competition. Its flagship pick-up truck, the R1T, is a direct competitor to established brands such as Ford and GM. In particular, Ford is planning to double production of its F-150 Lightning truck due to soaring demand. These large automakers are investing heavily in their pivots to EV models, and have the expertise and capacity to boost manufacturing output to meet rising demand. Rivian is much further behind in its manufacturing capabilities, so it may lose market share as it ramps up its own production.

The valuation is still high too, in my view. On a forward price-to-sales (P/S) ratio, Rivian shares trade on a multiple of 13. This does depend on it achieving its revenue forecast of $3.5bn in 2022, which is a big ask considering revenue was only $61m last year. By comparison, Ford trades on a P/S of 0.5.

So for now, I won’t be buying the shares. I see too many uncertainties ahead, which could mean further falls in the share price.

Dan Appleby has no position in any of the shares mentioned. 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 and Tesla. 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

• The BP share price is up 55% in 12 months
• Profits have been pumped up by high oil and gas prices
• It also has a growing focus on low-carbon energy

The BP (LSE: BP) share price has risen by more than 55% over the last year, as oil and gas prices have soared. This FTSE 100 stalwart generated an underlying profit of $12.8bn last year — the highest for eight years.

BP’s recovery has come as it’s promised to cut oil and gas production and invest more in low-carbon energy. I’m wondering if buying BP shares for my portfolio would enable me to profit from oil today and renewable energy in the future. Here’s what I’ve decided.

Changes are coming… slowly

Oil and gas production that was cut during the pandemic has not yet been fully restored. However, demand has bounced back strongly as life has returned to normal around the world. This has led to high oil and gas prices, with bumper profits for big producers like BP.

Although the company plans to cut oil and gas production by 40% by 2030, cash profits from this part of the business are expected to remain stable, at $30bn-$35bn.

This compares to expected 2030 profits of $9bn-$10bn from service stations, and just $2bn-$3bn from renewable energy.

These numbers suggest to me BP is still likely to make around three-quarters of its profits from oil and gas by 2030. This 110-year-old business isn’t going to abandon petroleum too quickly.

I’m watching the cycle

I think BP is performing well at the moment. But I’d guess that’s not difficult to do when oil and gas prices are trading at their highest levels since 2014.

History tells me that the oil and gas market is heavily cyclical. Unfortunately, BP does not have a great record of creating value for shareholders over the cycle. Today, BP’s share price is lower than it was both five and 10 years ago.

Over the last 20 years, BP shares have underperformed the FTSE 100 by a whopping 80%, excluding dividends.

Of course, past performance is no guarantee of future results. But BP’s latest guidance suggests to me that the company expects to see lower oil and gas prices in 2022, as supply and demand return to balance.

I also think it’s significant that the company plans to limit annual dividend growth to just 4%. Any extra surplus cash will be used for share buybacks, which have the effect of boosting future earnings per share.

BP share price: my decision

My sums suggest BP’s profits are likely to peak this year, before falling slightly in 2023. Broker forecasts suggest a similar view. I think that BP’s share price could rise further in 2022, but I don’t expect to see big gains beyond that.

BP shares are expected to deliver a return of around 8% per year from now on, based on the sum of the stock’s 4% dividend yield and expected 4% annual dividend growth.

An 8% return is in line with the long-term average from the UK market. However, given the uncertainty about BP’s long-term prospects, I’d prefer to buy the shares at more of a discount. For this reason, I won’t be buying BP shares at the moment.

Roland Head 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.

I’ve been screening for stocks that may have been oversold as stock markets have fallen. This led me to a company in the FTSE 250 as its share price has fallen a disastrous 51.5% so far this year. For some additional context, the next worst performer in the index is down by 39%. Still bad, but not quite as bad.

Let’s take a look to see if I should buy this stock for my portfolio.

A rollercoaster ride since its IPO

The company is Trustpilot (LSE: TRST), the global online review platform. It’s a widely used ratings service that’s trusted by many consumers across various different sectors.

Trustpilot listed through an initial public offering (IPO) on 26 March last year at a share price of 265p. It since rallied to a price high of 482p, or 82% above the IPO, but has crashed back down to 159p as I write today. However, I do wonder if this decline is totally warranted. I think the company could have an expanding economic moat as it’s a recognisable and trusted brand. This would be hard for a lesser-known competitor to copy, at least straight away.

However, I think the valuation was just too high to begin with, and more so when the shares surged after the IPO. As it stands, the company is loss-making, which adds risk to any investment. On a price-to-sales ratio, Trustpilot is trading on a multiple of 5 for 2022. This seems a touch high to my mind. Having said this, revenue is expected to grow at a pretty punchy 24% in 2022.

So today, I think the Trustpilot share price just rallied too far, and too fast, after its IPO. The selling pressure since the peak in the share price has meant it’s now the significant underperformer in the FTSE 250.

Should I buy this FTSE 250 stock?

I do view the company favourably. As mentioned, it’s a trusted brand, and this would be hard for a competitor to replicate. Indeed, the CEO said in the recent trading update that the company is “fast becoming a universal symbol of trust”.

On this point, the financial performance in the trading update for the full year to 31 December was positive, in my view. Trustpilot said it expects revenue to have grown by 24%, and its annual recurring revenue (which is more predictable, and therefore higher-quality income) grew by 26%. Encouragingly, this was ahead of the company’s expectations. So there could be a buying opportunity here.

The last issue I have, though, is just how high the share price volatility has been. I’m not sure the selling pressure is over just yet, so my initial investment may well fall in value if I bought the shares today.

On balance, I’m going to keep Trustpilot on my watchlist for now. I see the potential here, and there might be an expanding economic moat developing. I’ll review the company again when the final results are released on 22 March.

Dan Appleby 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.

With pandemic restrictions now seemingly relaxed for the foreseeable future, I think some UK shares have excellent growth potential. One such stock is Card Factory (LSE:CARD). Should I add the shares to my holdings?

Greetings and gift cards

Card Factory is a specialist retailer of greeting and gift cards as well as party products. It has over 1,000 stores in the UK and Ireland. It also now has an extensive online store to supplement its offering.

Due to its bricks-and mortar-business model, Card Factory struggled when the pandemic struck, as many of its stores were closed due to restrictions. Its share price tumbled and it had to borrow money and offer new shares to raise funds to keep the lights on. This did not help with investor sentiment. Unfortunately, recent years have seen the rise of online-only disruptors to its market, which has affected market share.

As I write, Card Factory shares are trading for 57p, making it a penny stock. At this time last year, the shares were trading for 33p, which is a 72% return over a 12-month period.

UK shares have risks

Despite my bullish attitude towards Card Factory’s growth potential, there are credible risks that could derail its progress. Firstly, the nature of the pandemic and threat of new variants could see retail locations closed once more if new restrictions come into force. This affected performance previously and could do so once again.

In addition, Card Factory has had to evolve to combat the threat of online-only disruptors. The rise of e-commerce has seen many consumers stay away from retail outlets and use online-only platforms for their greeting cards and gifts. I myself have used competitors such as MoonPig in recent times when sending cards or gifts to loved ones. These competitors could continue to eat away at market share and affect performance and returns.

A UK share I’d buy

I believe pandemic-related struggles could be a thing of the past for Card Factory. Firstly, its retail network is still as strong as ever and it plans to continue opening new stores in key locations if they could boost performance.

Next, Card Factory decided to bolster its online offering when faced with threats of competition and the changing face of retail. It plans to become a “multi channel retailer”. I believe past results after its online re-brand occurred show this could help boost growth in the years ahead with online sales growing exponentially. I do understand past performance is not a guarantee of the future, however.

Coming up to date, a trading update Card Factory provided for the 11 months ended 31 December 2021, filled me with confidence for the outlook ahead. It upgraded revenue expectations for the full-year period. It also confirmed it expects sales to grow nicely from over £360m last year, to more than £600m within a five-year period. Profit is not yet near pre-pandemic levels but overall trading seems to be. This tells me recovery and an eye on growth ahead is in full effect.

Overall I like the look of Card Factory shares for my holdings right now. I would add shares and expect to see growth and excellent returns over the long term.

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.

There are not that many dividend shares that offer a yield close to 7%. Among large FTSE 100 companies, there are a few. In fact, I have one of them in my portfolio – and I think the yield might be about to get even more attractive for me. Here is why.

Tobacco giant

The company in question is British American Tobacco (LSE: BATS), the owner of iconic brands such as Lucky Strike. The tobacco business fails to meet many investors’ ethical criteria. But for those who are willing to invest, it has historically been a lucrative business. Manufacturing costs are low, competition is limited, and the pricing power of premium brands enable the company to maintain attractive profit margins.

That model has come under threat with a decrease in cigarette smoking. That remains a big risk to revenues and profits. But the pricing power does enable a company like British American Tobacco to raise prices, which can help to support profits even if volumes fall. The company is also developing new product lines, although they risk hurting profit margins as, so far, they are less profitable than cigarettes.

Currently, the British American Tobacco yield is a tasty 6.7%. I expect some good news this week that could push that higher.

BATS annual results

This Friday, the company is due to unveil its final results for last year. That will include its decision on what to do next with its dividend. As one of the UK’s leading dividend shares, the announcement will be closely watched in the City.

I expect the company to raise the dividend. That would mean that the company would offer a higher prospective yield at its current share price. The company has increased its dividend annually for over two decades. That does not mean that it is guaranteed to keep doing so. Indeed, the company has emphasised that its dividend payout ratio of around 65% of earnings means that dividends could change in line with earnings.

But I see reasons for optimism. In a pre-close second-half trading update in December, the company said that revenue grew in excess of 5%, excluding currency impact. It also said it had seen strong performance in its key US market. That was driven not only by growth in next generation products such as vaping, but also in pricing for cigarettes. That could help keep profits buoyant.

I would buy this dividend share today

Tobacco shares have been in the doldrums for years but have had more positive momentum lately. The BATS share price has increased 20% over the past year, for example.

That means that the yield available to me if I buy its shares today is less than if I had bought a year ago, due to the share price gain. But if the dividend keeps going up, shares I buy today could still see increasing yield in years to come. Friday’s announcement could be the first step on that journey. Last year saw an increase of 2.5%, which, although welcome, was less than some recent BAT dividend rises had been. With more clarity now on business outlook than a year ago, I am hoping that Friday may see a bigger increase. I continue to hold BATS shares in my portfolio and am hoping for an increasing dividend yield.

Christopher Ruane owns shares in 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.

The idea of getting money without working for it is certainly appealing. But is it too good to be true? I do not think so, depending on how one approaches it. For example, one of my favourite passive income ideas is investing in dividend shares. By owning a tiny part of a large company, if it pays out some of its profits as dividends, I can benefit without lifting a finger myself.

Here is how I would aim to build passive income streams by using £35 a week to invest in dividend shares.

1. Get into a disciplined habit

My first move would be to start putting aside £35 a week, which is £5 a day. I might do that through electronic transfer, or physically putting the cash in a piggy bank on a regular basis. Either way, getting into the habit of regular saving would be important to my passive income ambitions, I reckon. That way, when other demands on my money arise as they inevitably will, I could focus on how to maintain my regular contributions.

Although it would take me some time to have a big enough sum to make it worthwhile for me to invest, I would set up a share-dealing account on day one. That way, when I was ready to start buying dividend shares, I could hopefully do so without delay.

2. Hunt for dividend shares to buy

As the pounds piled up, I would spend the weeks hunting for dividend shares that met my investment criteria. Different investors do not look for the same thing. As a new investor, I would also be keen to avoid common mistakes people make when they start investing.

So, for example, maybe I notice that Ferrexpo yields 12.3%. That means that £1,000 of Ferrexpo shares would hopefully yield £123 of passive income per year. That certainly sounds attractive to me at first glance. But if I looked more closely, some risks would come into view. Ferrexpo’s earnings power is concentrated in a single mining facility in Ukraine. That concentration of production in a country with heightened political risk could hurt Ferrexpo’s ability to earn profits and pay dividends in future. Added to that, its profits are affected by iron ore prices. That helps explain why last year’s dividend was more than 10 times higher than the level just four years before.

Ferrexpo might still be a good fit for me, depending on what my personal investment objectives and risk tolerance are. The point is that I would do detailed research before buying any dividend shares. I would not just look at a company’s yield without seeking to understand where the money to pay dividends came from. I would focus on finding shares with robust business models I felt could hopefully sustain or increase dividends in years to come.

3. Start earning passive income

With money in my account and research in hand, I could start buying dividend shares. Hopefully I could turn my dream of generating passive income streams into a practical reality.

At £35 a week, I would have £1,820 a year. So if I invested in shares yielding 5% on average, I would hope to earn around £91 in annual income from my first year of investing. Admittedly, that is not a huge amount. But it could well be the starting point of increasing, practical passive income streams for me.

Christopher Ruane 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.