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Warren Buffett is one of the best investors of all time. He has turned an initial investment of $100,000 into a multi-billion dollar company, one of the biggest businesses in the world today.

However, it is less well-known that the so-called ‘Oracle of Omaha’ is also a passive income investor.

Indeed, every day he earns millions of dollars in dividend income, equating to billions of dollars in income over the year. 

Any investor can copy the approach he has used to build this income portfolio over the past couple of decades. 

The ‘simple’ Buffett approach 

Buffett’s approach to finding income stocks is relatively simple. He is always looking for high-quality growth stocks to buy for his portfolio. And a marker he is looking for in these businesses is their ability to return cash to investors.

A corporation that can return lots of capital to investors can be an outstanding income stock.

What’s more, companies with excellent growth prospects have the potential to increase their dividends to investors. This can make them great passive income investments as they steadily increase the distributions and return more cash. 

This is the outline of the Buffett approach that I would follow to generate a passive income for life. By following this approach, I think I will be able to build a steady and growing passive income portfolio. 

Still, there is no guarantee this strategy will yield results. As dividends are paid out of business profits, there is always a risk a corporation could have to eliminate its payout in a period of economic disruption.

Further, with prices rising significantly in the current economic environment, company profit margins could come under pressure. As such, businesses may have to reduce the amount of money they return to investors.

Passive income stocks

As such, the type of companies I would focus on acquiring for my passive income portfolio are globally-diversified growth businesses. I would acquire all three of the businesses outlined below for these reasons. 

AstraZeneca is a great example. This enterprise has a global footprint and is investing in new treatments. These have the potential to generate substantial profit growth in the years ahead. 

Another example is the publicly-traded hedge fund Man Group. Indeed, this business has a global footprint attracting capital from investors worldwide. Currently, money is flowing into the global asset management market.

Wealthy investors are looking for new ways to earn a return on their money, and firms like Man benefit. As assets grow, the group’s income from management fees should expand. Rising fee income may provide more cash for management to return to investors. 

Airtel Africa, meanwhile, owns a portfolio of mobile tower assets around the world. Demand for mobile and data services across the globe is rising. This tailwind should help push the company’s earnings higher over the next few years. 

By adding these businesses to my portfolio, I think I can replicate Buffett’s passive income approach. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Airtel Africa Plc. 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.

Dividend stocks are getting a lot of attention right now. These are stocks that pay shareholders a cash income, out of company profits, on a regular basis.

Personally, I’m not surprised by the interest in dividend stocks as I think they can play a very valuable role within investment portfolios in the current financial environment. Here’s a look at four reasons I’d buy UK dividend shares for my own portfolio today.

Dividend stocks can provide protection

One big advantage of dividend stocks is that they tend to be less volatile than growth stocks. This means that they can potentially provide an element of portfolio stability.

We’ve certainly seen this in 2022. While plenty of high-growth stocks have fallen 30% or more this year in the recent market sell-off, a lot of dividend stocks have held up very well.

For example, one of my favourite UK dividend payers, Tritax Big Box REIT, is only down a few percent, year to date. By contrast, electric vehicle manufacturer NIO – which a lot of UK investors own – is down more than 25%.

Of course, dividend shares can still be volatile at times and payments can be cut, or even axed. However, in general, they tend to offer more stability than high-growth stocks.

Protection from inflation 

Another major attraction of dividend stocks is that they can provide inflation protection. They can do this in two ways.

Firstly, they can generate a return for investors (dividends) in the near term. When inflation is high, it’s better to get a near-term return than one in the future, because the return in the future is going to be worth less in today’s terms.

Secondly, rising yields (from companies raising their dividend payouts) can help offset inflation. One example of a company that just raised its dividend is alcoholic beverages company Diageo. In January, it said it would be increasing its dividend payout by 5%.

Two ways to profit 

A third advantage of dividend stocks is they can provide healthy investment returns. Right now, many UK dividend payers offer yields of 4%, or higher. That’s much better than the current interest rates offered on savings accounts. However, dividends are not the only source of return here. It’s also possible to generate capital gains from these shares.

The fact that these stocks offer two potential ways of generating a profit makes them very appealing, to my mind. It’s worth noting however, that dividends are never guaranteed, and it’s possible to lose money with dividend stocks.

Passive income potential 

Finally, investing in dividend stocks can be a great way to generate passive income – the ‘holy grail’ of personal finance. With these stocks, investors get paid regular cash income for doing absolutely nothing.

This means they can potentially provide financial freedom. By putting together a portfolio of high-quality UK dividend shares, investors can generate a passive income stream that grows every year.

Overall, there’s a lot to like about dividend stocks, especially in the current environment. Given their advantages, I plan to keep buying them for my portfolio in 2022, and beyond.

Edward Sheldon owns shares in Diageo and Tritax Big Box REIT. The Motley Fool UK has recommended Diageo and Tritax Big Box REIT. 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.

After more than 20 years of investing, my portfolio is looking pretty healthy. I’m confident that when the time comes to retire (in 20 years, or so), I’ll have built up considerable wealth. 

Having said that, if I could start my investing journey all over again, I’d probably do things a little differently.

I’d speculate less (I lost a lot of money in my late 20s in mining stocks) and focus more on capital preservation. I’d also focus more on dominant, long-term growth trends.

With that in mind, here’s a look at how I’d invest £20,000 for the long term from scratch today.

How I’d invest my first £20,000 today

The first thing I’d do, if I was starting my investing journey today, is look for a tax-efficient investment account. I’d want to pay as little tax on my investments as possible.

An obvious pick here would be a Stocks and Shares ISA. With this kind of account, I could invest the whole £20,000, and all capital gains and investment income would be tax-free. This could potentially save me a lot of money on tax down the line.

Funds for diversification

The next thing I’d do is invest around half the £20,000 in global equity funds. I’d do this to build a nice solid base for my portfolio.

Funds offer a high level of diversification so they’d help me on the capital preservation front. I’d pick a mix of actively-managed funds and passive funds to further diversify my money, and go for about four in total (£2,500 in each).

One actively-managed fund I’d definitely invest in is Fundsmith. This has an excellent track record having returned about 17% per year since its inception in 2010 (although past performance is not an indicator of future performance). It also tends to hold up quite well when markets are volatile because it invests in high-quality companies.

A handful of world-class stocks

My next move would be to invest around £6,000 in a handful of world-class companies. Here, I’d look for companies that are very dominant and almost guaranteed to get much bigger in the years ahead.

Four that I think could work well for me here are Apple, Microsoft, Alphabet (Google) and Amazon. All are extremely dominant in today’s world and look poised for strong growth in the long run.

Of course, these are all technology companies which adds a bit of risk. Tech stocks can be quite volatile at times. They also trade at higher valuations. I’d be looking to hold onto them for the long term however, so I wouldn’t be too concerned about short-term volatility.

High-growth opportunities

Finally, with the remaining £4,000, I’d take a ‘thematic’ approach and look to invest in a handful of stocks, or exchange-traded funds (ETFs), that are focused on niche markets with strong long-term growth potential.

Themes I might focus on include artificial intelligence, robotics/automation, cybersecurity, electronic payments, healthcare, and renewable energy. All of these industries look set for strong growth in the years ahead.

I’d expect this part of my portfolio to be higher risk. However, in the long run, it could potentially boost my investment returns.

I’ll also point out that I wouldn’t invest my £20,000 all at once. To reduce the risk of investing at a market high, I’d drip-feed my money into the market over a period of six months to a year.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Ed Sheldon owns Alphabet (C shares), Amazon, Apple, and Microsoft and has a position in Fundsmith. The Motley Fool UK has recommended Alphabet (A shares), 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.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

For much of the past year, Amazon (NASDAQ:AMZN) and Meta (NASDAQ:FB) shares have moved in a similar direction. Up until Q4 of last year, both stocks grinded higher, helping to push the NASDAQ to fresh all-time highs. This week though, a clear divergence can be seen. Meta flunked its latest earnings report, causing the share price to crash by 26% yesterday. In contrast, Amazon shares are up 12% today due to better-than-expected earnings. So which of the tech stocks should I buy?

The case for Amazon

On the face of it, it could make sense to buy Amazon shares given the better earnings. The company had tempered down expectations for the holiday season, mainly due to supply chain disruption. Yet in reality, net sales for Q4 were up 9% on the same period last year. Impressively, net income came in at $14.3bn, up from $7.2bn in Q4 2020.

This also helped to bring the full-year figures up above consensus. In quite a staggering figure, net sales for 2021 were $469.8bn, up 22% year-on-year. That’s almost half a trillion dollars recorded in a single year! Quite a feat for the tech stock.

It also announced that it’ll be increasing the price of the Amazon Prime service by $20 annually. Although this might cause some to cut their membership, I think the base is very sticky, so see this as a positive for future revenue streams.

However, there are some points of concern to note for the tech stock. The bulk of the gains came from the Web Services (AWS) division. The retail side of things lost money. So I do need to think about the risk of the retail side dragging on future performance due to higher costs. The share price is down 6.5% over the past year.

The case for Meta

Let’s get the bad news out of the way first for Meta. The share price is down 11% over the past year. The results earlier this week showed a slowdown in some key metrics, with the outlook for Q1 that was not great. For example, the daily active users (DAU) is a figure that has grown every quarter since it was introduced several years ago. For Q4, it dropped from the Q3 figure of 1.93bn to 1.92bn. This might not sound like a huge miss, but the fact it was a decrease did surprise investors.

The Q1 outlook for revenue was also below expectations. Analysts were looking for $30bn, but the company came out with estimates between $27bn and $29bn. Given that tech stocks like Meta trade heavily based on future earnings, lowering the expectations of revenue naturally dampens the mood.

However, there are still reasons for me to consider buying shares. Firstly, the pivot late last year in branding to Meta reflects the push towards the metaverse. I think this is going to be the future, so the investment in this area should pay dividends in years to come. Further, I think the market has overreacted to the latest earnings, partly due to the negative sentiment in the market in general right now. Therefore, I think that a short-term bounce back could be seen.

Tech stock battle

Personally, I’d prefer to buy Amazon shares right now. This is based on the momentum from current earnings and the robust strength of the AWS division.

Jon Smith has no position in any share mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon. 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 question of whether or not the current Rolls-Royce (LSE: RR) share price is a bargain for 2022 and beyond depends on multiple factors. Some of these factors are out of the company’s control.

For example, suppose there is another coronavirus variant, which sets the world’s recovery back significantly. In that case, it could have a dramatic impact on Rolls’ ability to recover from the pandemic over the next few years.

However, if there are no unforeseen developments over the next few years, I think the corporation has potential.

Indeed, management has laid out some ambitious plans to increase free cash flow over the next couple of years. If it hits these targets, the Rolls-Royce share price could look cheap at current levels.

Two main catalysts

In my view, two main factors will be responsible for the performance of the Rolls-Royce share price over the next couple of years.

The first is the company’s cash generation. If management can hit targets over the next couple of years, then the group should be able to improve the state of its balance sheet and begin returning cash to investors.

This catalyst will depend on the overall recovery in the aviation industry. Rolls’ main income stream is from service contracts tied to engine sales. These contracts last for years after the engine is sold to the customer. The number of hours billed varies depending on the number of flying hours booked.

Therefore the more time an engine spends in the sky, the better it is for the firm’s cash generation. 

This is why the most considerable risk facing the company is further pandemic restrictions. This would reduce flying hours booked by each engine and potential cash flow from service contracts. 

According to the company’s latest trading update, the group returned to a positive free cash flow position in the third quarter of 2021. Management has said it expects the enterprise to report an overall free cash flow position of £750m during 2022. 

Rolls-Royce share price valuation 

Based on these numbers and factoring in the total shares outstanding for the enterprise, I calculate that the company can generate a free cash flow of around 11p per share in 2022.

Based on this target, the stock is trading at a forward free cash flow yield of 10%. To put that number into perspective, in 2018, the free cash flow yield was about 3%. To return to the same valuation, the Rolls-Royce share price would have to hit around 350p. 

Of course, this is just the back-of-the-envelope calculation. It is only designed to estimate how much the stock could be worth in the best-case scenario. 

As I tried to highlight above, any number of factors could destabilise the company’s recovery.

Nevertheless, looking at these figures, I think it is clear the shares are undervalued today, based on the corporation’s potential. As such, I would be happy to acquire the stock for my portfolio as a speculative recovery play. 

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 been a troubling few days for Meta (NASDAQ: FB) investors, to put it mildly. The US tech giant slumped 20% on Wednesday following the release of latest trading news. Could now be a good time for me to buy Meta stock though?

Meta’s share price slumped following a panicked reaction to fourth-quarter financials. But let’s look at the good things first. The stock formerly known as Facebook continues to add overall users and an average of 2.82bn people used its platforms in the three months to December, up 8% year-on-year.

At a headline level Meta’s ‘Family of Apps’ — which include Instagram and WhatsApp — remain hugely popular. Mark Zuckerberg is hoping that the company’s decision to go all out on the metaverse will send user levels to the next level too. Analysts at Bloomberg think the metaverse will be the next big technological revolution with a value of $800bn by 2024.

Facebook users fall!

The problem for Meta, however, is that the costs of transitioning to the metaverse is walloping its bottom line. Total costs and expenses soared an eye-popping 38% in the final quarter of 2021, to $21.1bn. This overshadowed the 20% year-on-year revenues increase (revenues came in at $33.7bn). And it caused profits to fall a meaty 8% to $10.3bn.

Colossal costs aren’t the only thing spooking Meta investors either. The most headline-grabbing factoid of this week’s release was news of declining users at the California company’s core Facebook platform. The number of people logging in per day fell to 1.929bn in the final quarter of 2021 from 1.93bn in the prior three months.

What makes this number so shocking? Well it’s the first quarter-on-quarter drop in Facebook numbers in the company’s history. Fears that the social media platform is losing its sheen have been circulating for a long time now. This week’s news could be clear proof proof that Meta is suffering as competition for our attention rises.

Should I still buy Meta stock?

I think Meta’s share price slump this week could be the start of a steady decline. As equities analyst Laura Hoy of Hargreaves Lansdown said, the US tech share faces several major road bumps looking ahead.

The prospect of weaker advertising budgets is one. As Hoy noted, Facebook requires a lot of cash “to upgrade and expand its servers and networks”, which strong ad revenues provide. Another is the impact of more enormous research and development costs on profits. Total R&D spending here is expected to rise 26% year-on-year in 2022.

This week’s share price collapse provides an opportunity to buy Meta stock at a big discount to last week’s levels. But I don’t fancy grabbing a slice of the tech giant today. Sure, the metaverse could offer exceptional revenues opportunities over the long term. But in the meantime, Meta’s massive R&D costs and a weakening Facebook platform pose colossal risks. I’d rather buy other US shares today.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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 has been a roller-coaster couple of years for shareholders in Rolls-Royce (LSE: RR). As the pandemic hurt demand for air travel, the engine maker’s finances were pummelled. Some investors saw a buying opportunity in battered Rolls-Royce shares.

Here I look at how much I would have made if I had spent £1,000 on Rolls-Royce shares a year ago – and consider what I will do now.

20% return

Investing £1,000 into Rolls-Royce a year ago would have turned out to be a lucrative move for me. In the past 12 months, the shares have moved up by 20%. So I would have made a paper gain of £200 on my stake so far. If I owned the shares today, I could lock in that gain simply by selling them. The company has not paid a dividend in the past year – and does not plan one for 2022, either – so that £200 increase in share price value would be my total return.

Still, even without any dividends, I would be happy with a 20% return in one year. But a year ago there was no way to know what would happen next to the Rolls-Royce share price. There were large risks, such as uncertain timings for civil aviation recovery. There was also the risk of a further liquidity crunch leading to a rights issue diluting existing shareholders. Rolls-Royce has since returned to positive free cash flow, which in my view reduces the risk of a liquidity crunch for now at least. But the timing and scale of future demand recovery in civil aviation remains uncertain. That is a risk to revenues and profits at Rolls-Royce.

Why have Rolls-Royce shares increased in price?

In the past year, the FTSE 100 index of leading UK shares has moved up by 15%. Against that backdrop of a strong market generally, the Rolls-Royce increase looks a bit less impressive.

Still, a 20% increase in a share I owned would have been welcome. What drove this improvement? I think it reflects a shift in sentiment about Rolls-Royce. A year ago, investors were hoping for better times ahead but the company was still facing a tough immediate operating environment. Move forward a year and the engineer has far more attractive cashflows, demand has improved and the benefits of a cost-cutting programme are starting to be seen in its business results.

My next move

Will the Rolls-Royce share price increase 20% in the next year? Nobody knows – that is the nature of the stock market.

I do see reasons for optimism that there could be further upside for the shares. Civil aviation demand will hopefully see further recovery, boosting profitability in a key division of the company. More benefits of the cost-cutting programme will likely show up in the company’s performance. If it sustains free cash flow, investor confidence will improve in the firm’s long-term business model.

However, risks remain, including the possibility of further challenges to demand in civil aviation, something that airline Ryanair recently warned on. For now, I have no plans to add Rolls-Royce to my portfolio.

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.

Key Points

• Investing in UK shares like penny stocks could be a good idea as inflation surges
• Gold stocks could thrive in an uncertain environment
• I like property stocks too, but would avoid retail property

Inflation continues to rise at an alarming pace. The Bank of England has just predicted it could top 7% in the spring as energy costs surge. This presents risk for many UK shares as it threatens to weigh on economic growth and push costs higher. But this doesn’t mean I’d rather park my cash somewhere else like in a savings account, even as interest rates rise.

I’m with Hargreaves Lansdown’s senior personal finance analyst Sarah Coles on what we can expect. On the one hand she says that “there’s always the hope that now profit margins have been increased, further rate rises could persuade banks to boost rates more.” But she goes on to add that “with so much cheap money sloshing around at these institutions, there’s not a vast amount of pressure for this just yet.”

2 penny stocks I’d buy as inflation booms

I won’t settle for low interest rates on savings accounts, especially when there are many UK shares that could actually thrive as global inflation heads higher.

Here are two penny stocks I’m thinking of buying right now. I think their profits could soar as inflationary pressures increase.

Getting in on gold

Grabbing a gold-producing stock seems like a particularly good idea today. This is because this classic safe-haven asset tends to rise in price when inflation rockets and the value of paper currencies comes under intense scrutiny. There are other factors that could push precious metals prices higher in the near term too, like the worsening Ukraine crisis and fears over China’s rapidly-slowing economy.

I’d buy Serabi Gold to make the most of a long-term gold rush. Today the penny stock trades on a forward P/E ratio of just 5 times. I think it’s a top buy despite the ever-present threat of mining difficulties that could hit profits.

A property powerhouse

Buying into property is another sound strategy as rental growth tends to move roughly in line with inflation. Selecting a stock like shopping centre operator Land Securities could be dangerous, however, as consumer spending stands to suffer badly in times of rampant price rises. In other words the number of its tenants going to the wall (or seeking rent reductions) could potentially surge. I’d be happier to invest in Civitas Social Housing instead.

Residential landlords like this can expect profits to remain strong even as household budgets come under pressure. We all need somewhere to live, right? I’d buy this penny stock even though earnings could suffer if it fails to identify decent acquisition targets. Indeed, I think Civitas Social Housing could be a brilliant long-term investment too as Britain’s shortage of affordable housing rolls on, giving a sustained boost to rent levels.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.