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I’ve heard it said that some of the best long-term stock investors achieve annualised returns of around 30% per year. But that’s going some. And I don’t think I’d be able to manage that year after year for decades.

But what about 10% a year? Even that’s a high target. But I think it’s possible if I choose shares with care, manage my risk, and work hard at the process of investing.

Aiming to capture the power of compounding

And a 10% annualised return is worth having. Starting with £20,000 and compounding it at the rate of 10% annually for 42 years would lead to a pot worth just over £1m. But I wouldn’t stop there. Adding £100 of new money every month along the way would boost the compounded pot to a value of just over £1.7m over the same 42-year period.

Those illustrations take no account of inflation. In reality, I’d likely increase my monthly contributions as my earnings increased over the years. And the eventual pot would could be larger, thus preserving the spending power despite the effects of inflation.

It’s true that achieving a 10% return on average every year will take hard work. But I think the efforts are worth the ‘sacrifice’. And for me, the process of investing is absorbing and fun, so that helps! However, we’ve seen with various stock market crashes over the years that there’s huge potential for setbacks along the way.

Nevertheless, over a period measured in decades, I’m optimistic businesses can thrive. But not all of them. So, I’m following the investment greats such as Warren Buffett. He’s known for investing in businesses with enduring competitive advantages and pricing power. And for me, the best way of finding great potential investments is to look at the financial indicators that indicate quality.

Hunting for quality at a fair price

For example, I’d want a business to has a consistent, high looking profit margin. And it would need a record of robust returns against equity and invested capital. But one of the indicators I like most is a long record of consistent annual rises in revenue, earnings cash flow, and shareholder dividends.

But that’s only the start. Having identified candidates for my portfolio, I’d read annual reports and news flowing from the company to try to get a good grasp of the business. It’s important to try to understand why the business has a competitive advantage and what its prospects look like for the next few years.

Yet quality considerations are only part of the puzzle. The next step is to target the stocks at opportune moments when the valuation makes sense of a long-term investment in the company. And it often takes down-days, bear markets, and short-term setbacks within a business to deliver an attractive valuation and thus a decent buying price for the stock.

On top of that, I’d aim to manage risks by selling stocks sometimes if my investment thesis alters because of a change in circumstance in the underlying business. Or I might sell simply because of finding a better opportunity in which to invest.

Meanwhile, uncertain times such as we have today may be a good time to look for potential enduring long-term stock investments.

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.

The metaverse is a term used to describe virtual or alternative reality. This is usually experienced via gaming or headsets that allow me to ‘be’ in a different place. The sector is really popular at the moment and is only growing in demand from users around the world. As a result, stocks related to this area are also shooting higher in value. So here are three ways I can use stocks to benefit from this exciting theme.

Going direct

Firstly, I can invest in companies that are at the core of the metaverse. This relates to firms that host a virtual platform that allows users to register and get involved. One example of a stock in this area is Roblox. The business is one of the largest game creation systems and is expanding rapidly. The share price has gone from an IPO price of $45 in early spring to $113 currently. In fact, it has gained 45% in the last month alone.

Top stocks like this are a good way for me to access the gains from the metaverse. Logically, if the virtual world development continues to attract people, then the hosts (like Roblox) should stand to benefit the most.

The risk is that the specific stock I invest in doesn’t become the prominent ecosystem of choice going forward. As not all of the hosts are publically listed companies, I have an issue here as I can’t really diversify my risk.

Top stocks with indirect exposure

Another way to use top stocks for metaverse access is by investing in stocks that are indirectly related to the platforms. For example, Sony produces virtual reality headsets for the PlayStation. These headsets are likely going to play a large part in the user experience for the metaverse, to visually transform users to the alternative reality.

If the metaverse does continue to expand, I’d expect companies like Sony to see higher demand for the VR headsets. It might also branch off to specific add-ons, or sign a lucrative agreement with one or more of the hosting platforms to provide the headsets. It’s just one example, but is that buying stock in these types of companies should be less risky than a platform host stock. However, if the metaverse does do well, then I should see some benefit from these type of top stocks.

The risk here is that if a platform provider decides to make its own hardware, it could cut Sony out of the picture.

Metaverse advertising plays

Finally, I can buy stocks that are early movers in advertising and selling in the metaverse. A stock that comes to mind is Nike. Recently, Nike announced that it has designed Nikeland within the virtual reality world of Roblox. 

In-game purchases are still done with real money (fiat or crypto). So I’m certain that Nike will be able to generate revenue from this collaboration in the future. I think it’s a very smart move by the business. It opens a completely new potential revenue stream for the brand.

Overall, the metaverse is still a very new and young area. I’d look to invest in a host of stocks from each part of the above to diversify my risk going forward.

Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Nike. 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’m looking for beaten-down quality UK shares to buy this December. Markets have been volatile recently, and sometimes this throws up bargains for my portfolio. Here are two stocks that have fallen this year that I’m considering buying.

An investment platform

The first company is Hargreaves Lansdown (LSE: HL). It’s a huge investment platform in the UK with over £120bn in assets under administration across 1.5m clients.

But since 2019, the share price has been in a downward trend. In a year the stock is down 10% as I write. There’s been a cloud hanging over the firm since the Woodford Equity Income fund collapsed. Hargreaves Lansdown is facing potential legal action as it was a heavy promoter of the fund. I think this is weighing on the share price today.

I view this as a quality company though. For example, it achieves huge operating margins (last year it was 58%), and the return on its capital is consistently in the double-digits.

The valuation isn’t too demanding either. The forward price-to-earnings (P/E) ratio is currently 24. This has lowered from around 40 since 2019, suggesting again how the share price has weakened over recent years.

Even though I view Hargreaves Lansdown as a quality company, I’m still hesitant to buy the shares due to the potential legal action on the horizon. I think this will weigh on the share price for a while longer, so for now it’s staying on my watchlist.

Another quality UK share

The next company is Moneysupermarket.com (LSE: MONY). It’s a large price comparison website for insurance, financial products and the energy sector. Its share price has also been in steady decline recently, and is down almost 17% in a year.  

The company experienced lower demand across its travel and car insurance comparisons through lockdown as people were travelling less.

More recently, the spike in wholesale energy prices has made switching providers unattractive for consumers. Indeed, management expects negligible switching in the fourth quarter of this fiscal and calendar year. This will impact revenues generated from its price comparison service (energy switching was 16% of revenue in the fourth quarter last year).

Moneysupermarket.com does still achieve a high operating margin, and a return on capital in the double-digits. These figures have been declining over recent years, which I think reflects the difficulties the company has faced. Nevertheless, they still suggest that this is a quality business.

The valuation is also compelling. The P/E ratio for 2021 is 18, which falls to a very low 14 for 2022. I think this suggests that the recent issues at the company have been priced in to the shares.

It also announced the acquisition of Quidco in October. It’s the second largest cashback business in the UK, so it does fit well with Moneysupermarket.com’s other services.

In summary, I view Moneysupermarket.com as a quality UK share, and the valuation looks attractive. I’m considering buying the shares for my portfolio.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown and Moneysupermarket.com. 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’m searching for the best cheap UK shares to buy for my Stocks and Shares ISA. Here are three brilliant bargains (including two top penny stocks) I’m considering investing in for 2022.

A renewable energy stock on my radar

Things are looking extremely sunny for renewable energy stock US Solar Fund (LSE: USFP) as we move into 2022. Industry analysts are expecting demand for green electricity to pick up the pace as the battle against climate change steps up.

In a recent report, Deloitte, for example, said that it expects growth in the US renewable sector to accelerate next year. It reckons the industry will grow as “concern for climate change and support for environmental, sustainability, and governance (ESG) considerations grow and demand for cleaner energy sources from most market segments accelerates”.

Government support for green energy specialists is particularly helpful in the States. This is another reason why I like US Solar Fund specifically — the assets it’s invested in are located in California, North Carolina, Utah and Oregon. I’d buy this penny stock even though the intermittent nature of solar power generation can often cause profits turbulence.

A great inflationary hedge

I’m also thinking of buying Solgold (LSE: SOL) to protect my portfolio from the ravages of inflation. This is because the precious metal the penny stock produces attracts greater buyer interest when fears over paper currencies rise, in turn pushing prices higher.

Latest data from the World Gold Council shows how investment in gold-backed ETFs is hotting up. But it’s not just individual investors who are ramping up their exposure to the safe-haven metal. Developed central banks have added to their gold reserves for the first time since 2013, the WGC notes, with Ireland and Singapore making their first purchases since 2008 and 2000 respectively.

The World Gold Council recently suggested that gold purchases from central banks could hit 450 tonnes in 2021. That’s up considerably from the 255 tonnes they collectively snapped up last year. I think there’s a good chance bank policymakers will keep bulking up their assets in 2022 and beyond too.

Another dirt-cheap UK share

Tharisa (LSE: THS) is another precious metals producer I think stands to gain from the inflation boom. Like gold, platinum group metals (PGMs) also rise in value when inflation increases. They could also keep moving northwards if the Covid-19 crisis continues to roll on. 

Conversely, though, values of the PGMs Tharisa produces could rise if the economic outlook brightens. This is because industrial demand for the dual-role metals would likely improve. In this way I think Tharisa’s a great way for me to hedge my bets.

Of course there’s no guarantee that gold or PGM prices will rise. They could reverse for a variety of reasons, spelling trouble for Tharisa and Solgold’s top lines. What’s more, profits could take a hit if production problems occur. This is an ever-present threat to companies like these. As things stand today, though, I think both are highly attractive from a reward-to-risk perspective.

Royston Wild 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.

In November this year, electric vehicle charging company Pod Point (LSE: PODP) joined the London Stock Exchange. It’s an EV stock that I think could do very well next year.

Why could Pod Point be a top EV stock?

When it comes to loss-making growth companies like Pod Point I think it pays to focus on revenue growth and the market opportunity, and also the route to profitability. On all three counts, I like what I see.

Pod Point generated revenue of £17.2m in the year ended 31 December 2019 (a 45% increase from the year ended 31 December 2018) and £33.1m in the year ended 31 December 2020 (a 91% increase from the year ended 31 December 2019). Revenue increased £14.6m, or 123.0%, from £11.9m in the six months ended 30 June 2020 to £26.5m in the six months ended 30 June 2021

The EV market is set to grow massively. Electric vehicle sales increased by 160% in the first half of 2021 from a year earlier.

The company has great relationships and is winning new business so I think it can become profitable.

What else is to like?

The company was founded in 2009. I don’t think Pod Point was bought to market just so the owners could make a quick buck. The current CEO founded the business and still retains almost 1.8m shares in the company. He’s entrepreneurial, having previously founded and sold supercar rental club Ecurie25, which I find encouraging.

The company has manufactured and sold over 102,000 charging points across the UK and Norway. Pod Point has also installed a public network of over 5,200 charging bays across key locations including leading supermarkets. What this shows me is that it has scale and a product customers want, which bodes well for the future.

It has developed good relationships with a wide range of customers including automotive OEMs (such as Audi, Jaguar Land Rover, Nissan, Peugeot, Volkswagen, and Hyundai), as well as fleet management companies, property developers, couriers, and leisure operators. Therefore, it has diversified income sources.

What might hold back the shares?

Competition is a risk. However, at 30 June 2021, Pod Point had 102,000 charge points, compared to approximately 58,000 charge points installed by bp pulse. Pod Point’s directors consider bp pulse to be its next largest competitor in the UK.

Evolution in the market could also either render Pod Point’s technology obsolete or reduce demand for EV charging stations, but that seems unlikely. Also, it’s loss-making, which is a risk to be aware of.

Given its desire to grow and take market share I’m not overly concerned that Pod Point is loss-making. It’s a well-worn path in emerging industries for companies to have to invest heavily to get noticed and build up their infrastructure.

I think this market is hotting up and will continue to excite investors, and I think Pod Point could do really well in 2022. Once more results come out, I’ll consider investing in this EV stock if it becomes clearer it’s on the path to future profits and is winning new business.

Andy Ross owns no share 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’m not letting the Omicron outbreak dampen my investing appetite. As a long-term investor, I look for UK shares that will make me decent returns over a number of years, usually a decade or more. Even the possibility of near-term economic volatility doesn’t make me run for the hills.

History shows us that, even accounting for times when stock markets crash, share investors tend to enjoy an average annual return of 8%. So why should I let the ongoing Covid-19 emergency, rising inflation, or turmoil in the Chinese property market derail my plans?

Here are three top penny stocks I’d buy to hold all the way through to the early 2030s.

Power play

There are plenty of renewable energy stocks that UK share investors can pick up today. One that I’m paying attention to right now is OPG Power Ventures (LSE: OPG). This is because, as well as having a packed pipeline of solar projects for the next several years, the power plant operator plies its trade in India. This puts it in the box seat to exploit soaring energy demand in the country.

The International Energy Agency said in a recent report that it expects energy demand growth in India to be greater than any other country from now until 2040. This will be driven by an expanding economy and population as well as urbanisation and industrialisation, it reckons. I’d buy OPG to ride this theme despite the threat that project delays could significantly damage profits.

A top electric vehicle stock

I’m also considering buying Pendragon (LSE: PDG) for my shares portfolio to ride the electric vehicle (EV) boom. Increasing environmental concerns among drivers — allied to worries over future petrol prices following recent surges  — means sales of battery-driven and hybrid vehicles are soaring.

According to the Society of Motor Manufacturers and Traders, sales of such vehicles rocketed 67.4% year-on-year to 42,146 units in November. This meant new car sales overall rose 1.7%, ending four months of successive declines.

The market for EVs will only get stronger as concerns over the climate emergency accelerate too. So I’d buy Pendragon to make money from this trend, even as the threat of supply chain problems in the auto industry roll on.

Another penny stock for the green revolution

Rising concerns over vehicle emissions also bodes well for platinum producers like Jubilee Metals Group (LSE: JLP). The metal is a critical component in catalytic converters where it’s used to reduce harmful emissions. Recent legislative changes (especially in China) mean that higher loadings of these metals are required to combat global warming.

Platinum is also used in vast amounts to build hydrogen fuel cells. This is because it’s an excellent catalyst for splitting hydrogen into protons and electrons. This means demand for Jubilee Metals could soar if, as some expect, hydrogen cars become part of the mainstream over the next decade.

This makes the cheap UK share highly attractive in my book. That’s despite the threat that problems during the mining process could hit Jubilee’s bottom-line hard.

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

Warren Buffett may well be the most successful investor of all time. He became a billionaire in the 1980s and his stewardship of Berkshire Hathaway has seen the company’s A-shares reach a value of over $400,000. What can we learn from him? Well, lots actually. Over the years, through interviews, books, and letters, Buffett has given a detailed account of how he makes the sorts of investments that reap double or even triple digit returns. Here are some of his tips I’m using to help build passive income for my own portfolio.

Fundamentals, not share price

Warren Buffett always stresses the importance of the business fundamentals. For the most part, watching a stock go up and down is stressful, exhausting, and unhelpful. Many new investors make the mistake of buying when the price goes up and selling in a panic when it goes down. But so many factors effect share prices in the short term. Not only is it impossible to predict these swings, but often they tell us nothing about the health of a company.

If, however, an investor familiarises themselves with how much debt a company has, how much cash it has on hand, and if it turns a steady profit, they will be in a much better position to know if the company is healthy or not.

How does this apply to passive income? If a company pays a dividend (a portion of profits allocated to shareholders) it’s important to know if the amount it pays is affordable. Will paying dividends today hurt the company in the long run? You don’t need to be a genius to read a company’s financial statement, and it helps us choose which companies are worth investing in.

Invest in what you understand

The next most important tip is understanding what you are investing in. Buffett has often been criticised for missing out on the tech boom of the last 20 years. But he has always been open about the fact that he doesn’t understand how those companies make money, so he doesn’t invest in them. That’s not to say that Facebook or Google are bad companies, only that he wouldn’t be able to tell the difference between them and bad tech companies. I personally don’t invest in banking for this same reason, but I do invest in renewable energy.

It is always a good idea to try and learn more about different business sectors as we grow more confident in our investing, but Buffett suggests we focus on what we already know well. Peter Lynch, another famous investor, echoed this sentiment in an interview with CNN. “I know restaurant managers who invest in IBM, but I always ask why they don’t invest in restaurants. They know what sorts of challenges they face and know if a restaurant is profitable. They know how that business works”.

Patience

Lastly, Buffett is adamant that an investor should be patient. There might be a great company out there, but if the share price is too high, it’s better to wait for it to come down. There could be a market crash and your investments may go down in value, but if you wait the price could come back up.

It might not feel like it, but stock market will always present new opportunities. We just need to wait for them.

James Reynolds 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.

As I look to the new year, one of my top aims could be to improve the quality or the yield of the top dividend shares I own. However, what if I didn’t own any income paying stocks but wanted to get started? From my experience, below are the key steps that I’d consider in order to feel confident in my portfolio.

Picking my risk level and target dividend yield

The first step would be to set my risk level. This is pretty much the starting point in my opinion, as everything else then starts to fall in place. I need to decide whether this pot is for risky investments with high levels of income, or for more conservative picks that potentially could be more sustainable but with lower dividends.

Once I’m happy with my decision, I can then move to step two and select my average dividend yield. This yield could be very specific, for example if I’m looking to beat the current level of inflation (4.2%). Or it might be a nominal figure that I’d just like to have as a return, for example 5%. 

Then I can move onto step three, which involves selecting a group of specific top dividend shares. Ideally, I want to pick between half a dozen and a dozen stocks. This way, I can diversify my risk of a company cutting the dividend in 2022 or beyond. Also, the more stocks I own, the easier it’ll be to blend all the yields together and achieve my target dividend yield from step two.

Managing the top dividend shares over time

Step four involves deciding how much money I’m going to invest. I can decide to invest a lump sum in one go, or split things up and invest a portion of money on a regular basis. This decision often depends on how much free cash I have at the moment, versus my cash flow over the next year or so.

With that sorted, I then can pull everything together and buy the top dividend shares. However, this isn’t the final step. Step six is actually an ongoing process of monitoring the income portfolio. After all, if a company stops paying a dividend then I might need to consider selling it and buying a different stock.

Further down the line, I also might decide that my risk level, the target yield, or the money I can invest has changed. This again would require me to alter the portfolio. Ultimately, the final step means keeping an eye on things and being flexible to adjust my shareholdings over time.

Taking things step-by-step

Overall, the above six steps provide me with a clear and easy way to break the process down. Building a portfolio of top dividend shares might seem daunting. But by taking things in turn and ticking off the steps one-by-one, I can look to reach my end goal.

Jon Smith and The Motley Fool UK have 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’m always on the lookout for passive income ideas. They can be great ways to support a salary as passive income is earned even when I’m at work. And if I can grow my pot over time, I’ll be a lot more comfortable in retirement.

This brings me to the FIRE movement, or ‘Financial Independence, Retire Early’. It’s become popular over recent years to aim for early retirement. However, if I do want to retire early, financial independence is key. This is where passive income comes in.

Whether or not FIRE is the end goal, I still want to build my passive income stream. Here are two ideas I use, starting with only £300 a month.

Dividend stocks

For income to be truly passive, I think dividend stocks are an excellent option. I can buy shares in a company and become a part-business owner. This means I’m entitled to a share of the profits the business generates.

OK, I’d only be a minority shareholder, I have no say regarding how and where the company spends the profits it generates. This is up to the executive team and board of directors. They may invest all of the profits to grow the business and not pay a dividend. 

But many do pay out some of their profits as dividends and that’s where I want to invest to achieve passive income.

I’d start by buying high-dividend-yielding stocks with my £300 in the first month. In each subsequent month I’d buy another stock that offers a high dividend yield so my portfolio becomes diversified over time.

I have to keep in mind that dividends aren’t guaranteed. They depend on the profits that the business generates, and the decisions of the management team.

Passive income with real estate

The next option I view as a great way to generate passive income is exposure to the property market. I don’t mean buying physical property and renting it out. This requires work to manage tenants and various other tasks, so isn’t truly passive.

But I can buy shares in a real estate investment trust (REIT) that manages a portfolio of real estate for me as a holder. REITs have to pay out at least 90% of taxable earnings to shareholders, so they’re another truly passive way to earn income.

Because REITs are exposed to the property market, there’s a good chance of some inflation protection for my portfolio too. 

They’re not infallible, of course. Even though they have to pay out most of their earnings to shareholders, there’s still no guarantee I’ll receive a passive income stream. These companies are exposed to the property market after all, and require tenants to pay rent to generate earnings. If the property market struggles as it did last year, there’s a good chance my dividend would be cut.

However, I still think REITs are a good option to grow my passive income over time.

Views expressed 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.