Warren Buffett, the billionaire investor, enjoys the ‘game’ of investing. It’s been his life’s work, and he’s still at the head of Berkshire Hathaway at the age of 91.

As someone with no savings before the age of 30, building even a fraction of that wealth can seem like an impossible dream. But by paying attention to his method and employing some of his key virtues, I believe I can learn from Warren Buffett’s example.

Compounding interest

Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t, pays it.” 

Compound interest is when the value of an investment grows exponentially over time. For example, if a portfolio of £100 grows by 10% it is now worth £110. If that £110 then grows by a further 10% it is worth £121, then £133.1 and so on.

The stock market grows, on average, around 7% per year. At that rate, it would take 10 years for me to double any money invested. Not unreasonable at all. However, Buffett’s yearly letters to Berkshire Hathaway stockholders reveal that he has earned compounded annual gains of roughly 20% since 1964.

That’s doubling every four years! Annualised returns at that pace explain a lot about why he’s now a multi-billionaire.

Buffett focuses on fundamentals 

So how does Buffett get such high returns for himself and his shareholders?

In his 2021 shareholder letter, Buffett emphasised his focus on selecting high-quality enterprises. These are companies that can increase their profits year after year, have high free cash flow, low debt and a product or service that continues to sell well during bad economic times. It does not mean chasing trends or trying to get in on the new ‘hot’ stock option. Coca-Cola is a perfect example of this and is why it is one of his largest holdings.

So should I just buy what Buffett has? Not necessarily. Buffett takes a long time choosing shares, and even longer waiting to buy them. He tries to buy stocks when ‘great‘ businesses go ‘on sale‘ or trade below their intrinsic value. Then he holds onto his stock as the companies’ earnings multiply. Apple makes up a significant portion of Buffett’s portfolio but has shot up in value since he invested in 2016. There is a good chance will continue to grow, but I don’t want to be chasing trends. Instead, I need to look for companies that have solid fundamentals but haven’t had that explosive growth.

Long-term investing

To take full advantage of compound interest and a growing business, Buffett thinks long term. He only buys a stock if he knows he wants to hold it for years, even decades. To investors like myself, this is an even more important virtue. I don’t have the time or the resources to predict the movements of the stock market. Trying to make a ‘quick buck’ trading is only likely to lose me money.

The best, most consistent way anyone has profited from the stock market has been by investing in great companies and holding for the long term.

All investing has dangers, but without risk, there can be no reward. My strategy for generating wealth at 30, is to save as much as possible every month. Then, like Warren Buffett, carefully select companies for their income growth, stability and unique products, and hold them for years.

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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.

Purchasing dirt-cheap British shares, and knowing I’ll own them for decades, strikes me as a fantastic method to develop long-term wealth. Right now, I think that many great British companies are trading for way below their true values. That being said, nobody knows where share prices will go next, especially in the near term. I might easily stock up on what I believe are bargain shares now, only to discover that they’re much cheaper a year from now. This is why, when I buy shares, I fully intend to own them for at least 10 years.

I’m buying dirt-cheap British shares today

History shows stock markets have beaten practically every other investment over the long run. If I can somehow buy shares while they’re cheap rather than costly, they’ll do even better. I think that recent market downturns and the ongoing effects of the Covid-19 pandemic have created some fantastic buying opportunities. Some company shares are at their lowest prices in over a decade and I’m eager to scoop them up while I can. For example, Rolls-Royce is currently trading at 94.16p, its lowest since 2005. 

I must keep in mind that just because a stock is cheap and British, doesn’t mean it’s automatically a good buy. There’s usually a solid reason prices have fallen. Sales may be declining. The costs of doing business may be increasing. The competition could be too fierce, and smaller, more agile competitors may be stealing market share. The company’s management plan might have gone off the rails or consumers may have lost interest in its product.

However, there are a few key metrics I’m keeping an eye out for that could indicate when a company’s stock is selling for far less than it ought to be. These indicators can be the P/E ratio, the discounted cash flow or even the amount of investment pouring into the firm to help develop new products.

The key is to hold for the long term

Before buying British shares that appear to be dirt-cheap, I’ll examine them for all of these risks. I prefer organisations that have experienced minor setbacks and appear to be on the mend. In some circumstances, the setback was beyond their control (the pandemic is a good example). In other cases, the market may have reacted too strongly to a single set of disappointing data. Their current prices may not reflect their future possibilities in this situation.

To keep with the Rolls-Royce example, the aeronautics company took a serious hit to revenue in 2020, while operating costs also went up. But after careful restructuring, it was able to come back to profitability in 2021. This restructuring could now go on to increase its profit margins for years to come. All I need to do is be patient.

Of course, the biggest risk is that the firm will never recover. Sometimes, no amount of restructuring can save a company. Just ask Toys ‘R’ Us. To counter this, I would establish a well-balanced portfolio of at least a dozen equities to spread my risk. As global stock market volatility increases, there should be plenty of cheap British shares to choose from.

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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.

I think that one of the best ways to build a passive income stream is through investing in dividend stocks. Many companies pay shareholders some of the profit they make in a given year and this payment is called a dividend.

The average dividend yield for the FTSE 100 right now is 4.1%. I believe this is a decent amount to use when determining the UK stock market’s ability to provide passive income through shareholder dividends.

Average yields

The Footsie’s average yield fluctuates as the companies in it adjust their payments to fit their financial situations and as share prices change. Sometimes the yields can go up, but they can also go down. However, several UK firms pay more than the average of the FTSE 100 index. As I write, Rio Tinto, the major mining firm, has a dividend yield of just over 9.8%. National Grid, the utility focusing on electricity, estimates a yield of around 4.6%. Vodafone, the telecommunications company, is paying roughly 5.9%.

These numbers are all higher than the FTSE average. But it’s worth remembering that no company is under obligation to issue a dividend and may be forced to cancel them in extreme circumstances. The covid-19 pandemic forced lots of UK companies to do this in 2020.

Pay attention and diversify

Different industries make money in different ways. Some can be expected to be steady earners all year round. Others, like mining and commodities, can be more cyclical. For companies like these, dividends might come and go. But that doesn’t rule out the possibility of me investing in cyclical stocks. It simply means that I must choose the right moments to invest and keep a close check on my equities while they are held.

Natural resources stocks are attractive to me right now, so I’m interested in companies like Glencore, Anglo American, and BP. However, when it comes to a dividend-driven investment plan, I believe that diversification across sectors is very important. I know that these industries probably won’t be booming so much in the future. So defensive stocks like Imperial Brands, Tate & Lyle, and some others highlighted in this article would also be on my radar.

High-dividend stocks tend to have other valuable qualities as well, which is one of their greatest advantages. And one hypothesis I’m following right now is that in the next bull market, firms with strong value characteristics would likely lead the charge upward.

After all, it’s difficult to dispute that growth stocks with high valuations have recently seen significant losses. And it might indicate that they’ve had their moment in the spotlight for the time being, and possibly for years to come.

£1,000 per month in dividends

To earn £1,000 each month in dividends, I would need a portfolio worth around £300k. At 4.1% I could potentially receive £12,000 in yearly dividend income. Building a portfolio of this size will require careful planning, saving and investing over many years. But it’s not impossible. By starting to invest today, focusing on the long term, and reinvesting the dividends I earn along the way, I could reach that goal much sooner than by simply saving.

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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.

I normally try to use as much of my ISA allocation as feasible at the start of each tax year. Indeed, studies demonstrate that using as much of the allowed amount as feasible, as early as possible, can result in higher tax-free returns.

However, at the end of the day, what counts most is my financial status. It’s not the end of the world if I can’t come up with the whole limit at the start of the tax year. Since there are no restrictions on when I may invest in a Stocks and Shares ISA, I can continue to invest regularly throughout the year. The amount of money I can save during the tax year is the sole restriction and is capped at a maximum of £20,000.

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.

Choosing Stocks and Shares ISA investments

I’d search for both income and growth options while shopping for assets for my ISA. These, I believe, will allow me to balance the portfolio with a range of different stocks and income methods that should add to its value in as many ways as possible.

I’d also seek a combination of mutual funds and individual equities. BlackRock Throgmorton (LSE: THRG) is now one of my favourite investing funds. This trust invests in small-cap growth stocks in the hopes of outperforming the market. It also pays a small 1.3% dividend yield at the time of writing.

I believe it offers the ideal combination of development and income to meet my ISA objectives.

This trust does, however, impose a performance fee in addition to a usual management fee. In the long term, these fees may eat into my profits. And if the fund doesn’t choose the correct assets, the results might be far worse. These are the major dangers and problems of investing in the stock market through an investment trust.

This is why, for my Stocks and Shares ISA, I would also select a few shares from specific companies I believe to be safer bets.

Single stocks to buy

BAE Systems and Vodafone are two stocks that I would consider purchasing. These firms are attractive income opportunities, with dividend yields of 4% and 6%, respectively. They’re also benefiting from growth tailwinds. Increased defence spending should improve BAE’s sales and earnings. Meanwhile, Vodafone may benefit from the increasing availability and necessity of mobile data.

As time goes on, these businesses may encounter challenges such as increased expenses and competition, which might eat into profit margins. However, given their long-term development and income potential, I believe these companies would be excellent additions to my tax-efficient portfolio.

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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.

The stock was trading for more than 600p at the beginning of January. But the price sank to roughly 300p in the middle of February as tensions between the countries grew. Then, when Russia finally invaded Ukraine two weeks ago, the share price plummeted to around 50p.

Currently trading at around 80p (down more than 80% since the start of the year), is this mining giant too cheap to ignore?

Toxic association

Lots of shares are struggling right now. But it seems to me that Evraz’s stock is under extraordinary pressure. This could be because Roman Abramovich, the company’s major shareholder, is believed to be a close friend of Vladimir Putin. 

Russia also accounted for $5.5bn of the group’s total $14.1bn in revenues last year. It has a strong presence in the country and, like many steel companies, buys large quantities of raw materials there. Therefore, sanctions will hit Evraz disproportionately hard.

Even if the situation in Eastern Europe improves tomorrow, I doubt Evraz’s stock price will recover to its earlier heights. The war has damaged Russia’s image and many businesses may think twice before investing in the country again.

It’s not all bad news

Evraz is confronted with enormous obstacles, but there are some pieces of good news. For one, Evraz does not only operate in Russia. As previously stated, the area accounts for just around a third of the company’s sales. Asia, America, Africa, and Europe are home to the rest of the company’s businesses.

As far as we know, these enterprises are still operational and may be producing windfall profits as supply restrictions push up steel prices. This is something that investors should think about while evaluating a company. The corporation will have worth as long as these divisions continue to generate revenue for the group. But, because the situation is always changing, it is hard for me to quantify the worth of these procedures.

Share price outlook

In light of the events in Ukraine, I believe Evraz’s stock price will remain volatile for the foreseeable future. Companies with exposure to Eastern Europe are likely to stay unpopular with investors until we have more information on how the situation in the area will be resolved.

Nonetheless, if a solution to the crisis is found, the stock might skyrocket. If the uncertainty goes away, the company may be undervalued at its present levels.

Although the stock has potential in the best-case scenario, I will not add it to my portfolio. I believe there is now much too much uncertainty around the firm and the economy as a whole. I’m going to stay away from Evraz till things calm down.

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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.

Shareholders in several UK and US stocks have seen their investments drop in value this year. And the common thread is that most of the names that have plummeted were previously high-performing equities.

In the UK, I’m referring to organisations like Experian, a multinational information services firm. Since the beginning of 2022, the stock has dropped by roughly 16%. However, at 2,805p, it’s still up 26% in the last year.

High-value, quality businesses

Experian, in all other respects, is in perfect working order. The business is strong and growing, and the organisation performs well on quality metrics. The forward-looking earnings multiple is now at 27. And that’s against profit growth that’s expected to be in the low double-digits.

Croda International, Halma, and Spirax-Sarco Engineering are just a few instances of similar companies, I feel. I see them all as strong companies with bright futures. I’d want to have those stocks in my portfolio one day. However, my impression of the market is that it hasn’t yet finished adjusting prices to properly reflect a company’s potential.

Market retraces

Mark Minervini, a super-trader in the US, has a 50/80 rule. When a leading stock reaches a very high price, he believes it has a 50% probability of dropping 80% and an 80% chance of dropping 50%. And a previous leader’s average decrease is more than 70% from peak to trough.

Of course, he’s not referring to the underlying performances of any firm. In many circumstances, regardless of the share price, they can continue to expand and perform successfully. When values get inflated, however, equities may reverse their gains by frightening amounts. Minervini’s insight isn’t anything I’d build my entire investment career on. But it is food for thought.

Another piece of market wisdom claims that in the following bull run, the leading stocks of the preceding market surge are frequently replaced by new winners. This is why I’m reluctant to add companies like Tesla and Amazon to my portfolio at this time.

In several situations, I’ve found that equities with strong value features have recently exploded in price. As a result, it appears that we may be witnessing a mass investor shift away from high-priced growth and technology stocks, and toward firms with strong value qualities.

Shares I’d buy now

It’s my opinion that such value bets will lead the next major bull run. So, if I had £1,000 to invest right now, I’d buy Rolls-Royce and Warren Buffett’s Berkshire Hathaway.

Rolls-Royce has had a difficult time, but the share price is at its lowest since 2005 and it has been working to diversify its revenue streams. It has doubled down on lucrative military contracts and entering the clean energy market. Some analysts, looking at discounted free cash flow, estimate the share price to be more than 40% below its fair value. But they also believe this value won’t be realised for a few years, as Rolls-Royce needs time for its investments to pay off.

Berkshire Hathaway is, in many respects, the ultimate value investment. With a price-to-earnings ratio (P/E) of 0.0059 and diluted earnings per share of $25,000+, few companies score so highly on classic valuation metrics. The biggest risk I see here is that we haven’t seen any significant retrace of Berkshire Hathaway’s share price. However, considering Buffett’s excellent track record, it strikes me as a possible exception to this rule.

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James Reynolds owns Berkshire Hathaway (B shares). 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.

Recent results

The full-year figures for calendar year 2021 were just released by Rolls-Royce. As a present shareholder, I was glad to see the company turn in a £513m profit instead of a £1.97bn loss as in 2020. This indicates a significantly enhanced operational environment. Indeed, cash outflow for the period plummeted from £4.18bn to only £1.44bn. This is an indication that Rolls-Royce’s stock is levelling out.

In addition, in 2021 the company sold several enterprises, including AirTanker Holdings and ITP Aero, resulting in estimated revenues of roughly £2bn. This might help the corporation pay down its £7.88bn debt load.

Why are Rolls-Royce shares so cheap?

We can better grasp if a company is undervalued or overpriced by looking at its price-to-earnings (P/E) ratio. Based on expected profits, Rolls-Royce has a forward price-to-earnings ratio of 22.27. When compared to two key competitors, Safran and General Electric, which register 29.85 and 27.86, respectively, Rolls-Royce shares could be undervalued. 

Deutsche Bank‘s price estimate of 130p has been confirmed. And Berenberg also set a ‘buy’ rating with a target price of 160p this month. With the shares presently priced at 101p, I believe the Rolls-Royce stock price can continue to rise.

That said, it’s important to note, that subsequent pandemic variants might put a stop to the company’s comeback.

Sustainability at its core

Rolls has suffered a lot during the pandemic as airlines have stayed on the ground. But crucially, the firm’s focus for technological development and investment of late hasn’t been all about airline engines. It’s also been about fossil fuel energy alternatives — notably nuclear. The Qatar Sovereign Wealth Fund invested £85m in the company’s plans for Small Modular Reactors (SMRs) in December 2021. These will generate electricity using nuclear energy and should be connected to the grid by 2030.

And in its core air travel category, in November 2021, the company was also testing electric planes to help transition the aviation industry to cleaner energy sources. These studies were conducted in tandem with engine testing using 100% sustainable aviation fuel. This would be a significant step toward decarbonising the sector.

With recent results, I’m more hopeful that Rolls-Royce stock will recover and I’ll be adding more to my portfolio.

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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.

The word ‘crash’ frequently conjures up feelings of terror in investors. However, I believe that a stock market meltdown may provide a once-in-a-lifetime opportunity to assist me in boosting my investment results. It could even allow me to retire sooner. Here’s how.

Building a share portfolio for retirement

Accumulating a portfolio of stocks and bonds significantly increases my chances of building a retirement nest egg. Any capital I invest has the chance to grow exponentially over the next 10, 15 or 20 years. However, stock values can go up and down, and dividends are never guaranteed. This is why I’m spreading my retirement portfolio across a wide range of companies and industries.

Great companies on sale

Firstly, I’m concentrating on high-quality businesses. No small-cap start-ups for me. Larger firms may not grow as fast, but they are more stable. Plus, I have time on my side. Retirement is still decades away and with the longer-term view I have, the more I’m likely to benefit. So, in my retirement portfolio, I’d invest in a combination of long-established firms that offer good dividends, as well as growth stocks. In this example, I’ll concentrate on an income stock like British American Tobacco (LSE: BATS).

While stock values may be down during a crash, the underlying business remains more or less the same. Provided the company does not have a lot of debt and it can maintain (or even increase) sales during volatile times, then I don’t need to worry about investing in them. Warren Buffet would tell me to buy more shares!

Better dividend value

Let’s look at the March 2020 market meltdown as an example.

Shares in British American Tobacco currently trade for 3,162p and generate a staggering dividend yield of 10.28%. However, in March 2020, I could have purchased these identical shares for just over 2,500p. Not only would my portfolio have gone up in value by more than 20%, but the additional shares I would have been able to afford would now be earning me an insane yield.

It’s always good to remember that dividends are not fixed values. They can go up and down, or a company could choose to not pay one at all. But the difference of a few percentage points in yield can take years off of a retirement goal.

If I invested £1,000 at an annual compounding rate of 8.2% for 25 years, I would potentially receive £6,173 in dividends. It would take me 39 years to earn the same amount of dividend income from the same investment compounding at 5.2% yearly.

Using a market crash to my advantage

These numbers are only to illustrate a point.

However, the principal remains the same. Through buying when the market is down, I could move my retirement forward without changing anything else about my investments. My money might work considerably harder for me if I bought during a market crisis. I don’t try to time the market very often. However, if a market crisis results in high-quality enterprises trading at sale prices, I will fill my boots — and hope to be able to put my feet up sooner.

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James Reynolds has no position in any of the shares mentioned. 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.

A dividend yield that beats inflation

As energy and food costs continue to surge, inflation is likely to rise further in April. Rio Tinto declared an astronomical 8.8% dividend yield ($10.40 per share) during its results call, while the Bank of England expects inflation to peak at 7.25%. Dividend yields decrease as the stock price rises, but if I were to acquire the stock at its current price, this would outperform the predicted inflation rate. As a result, I think the commodity giant would be a good addition to my portfolio.

Growth potential

Even though many experts expect Rio Tinto’s growth to slow in the short-to-medium term, I remain optimistic about the company’s potential to at least continue its present trajectory. The majority of its revenue comes from China, the world’s greatest producer of iron ore (57.2%).

Rio Tinto hopes to profit from the robust economic resurgence following Covid since China is a rising market with space to grow in the manufacturing sector. Following a recession, many countries tend to invest extensively in manufacturing, and China will be no exception. Positive official manufacturing production data, which have increased every month since April 2020, have further encouraged this mood.

Furthermore, if the price of iron ore continues to crawl back up around $150 per Dry Metric Ton, a bullish commodity market will aid profit margins for the foreseeable future. It’s also worth mentioning that Rio’s stock is now selling at a discount to its all-time high of 13%. With a price-to-earnings (P/E) ratio of 6.63, the stock has the potential to rise in the weeks running up to its dividend-payment date in April.

Downside risks

Despite all of the advantages of purchasing Rio Tinto, there are a few risks linked to the company’s stock. For one thing, many analysts believe the dividend could decline over the next three years as a result of weaker economic growth and higher processing costs. This could wipe out any special dividend and force Rio Tinto to revert to its ordinary dividend yield of around 5%. Increasing energy and labour expenses have already put a ceiling on the company’s earnings potential in 2021, according to the company’s results report.

Furthermore, Rio Tinto’s profit margins will be influenced by the price of iron ore, which might fall as low as it did in late 2021.

Nonetheless, I’m contemplating adding Rio to my portfolio while keeping an eye on the macroeconomic situation leading up to the dividend-payment date.

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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.

I think this will result in an accelerated transition to renewable energy production across Europe. This could potentially create room for hydrogen fuel companies to flourish, particularly as a replacement for natural gas.

The benefits of hydrogen

Hydrogen is an abundant and reactive element with a lot of benefits to its adoption. We can produce it without releasing carbon dioxide. (Green hydrogen comes from running water through an electrolysis machine). Like oil or gas, we can burn hydrogen for heat or run it through a fuel cell to create electricity.

Hydrogen also acts as a store of energy. It must be pressurised and cooled but it can then be transported. Electricity loses energy the further it has to travel which is why we can’t power Europe with solar panels in the Sahara.

Use cases

One important use case is that hydrogen fuel could run industrial machinery. Electric cars function well enough on batteries, but heavier machines like buses, trucks, and diggers weigh too much. Just last year, JCB signed a multibillion-pound deal to supply green hydrogen to the UK, showing it recognises the possibilities hydrogen fuel offers.

Most importantly for the current moment, however, hydrogen could also be pumped into homes as a way to heat boilers and light gas stoves. Staffordshire university began mixing hydrogen into its gas supply back in 2020 and have seen no negative effects so far. The Energy Networks Association believes hydrogen could make up to 20% of all gas in the national grid by next year if policy makers are willing to make the switch.

Hydrogen shares

The UK has two home-grown companies that could exploit a sudden uptick in demand for hydrogen gas.

ITM Power manufactures the electrolysis machines needed to produce green hydrogen. The company announced several new expansions and partnerships over the previous year, but so far remains unprofitable. This doesn’t concern me too much at this stage. ITM has managed to consistently raise money without going into debt, showing a strong degree of investor confidence.

Another UK company I’d consider adding to my portfolio is AFC Energy. This Surry-based company manufactures the fuel cells needed to use hydrogen as a fuel. AFC has an advantage over its competitors because of a patent it owns on alkaline fuel cells. This new design can generate energy from lower purity hydrogen and is an innovation that could significantly reduce fuel costs for companies.

Unfortunately, AFC suffers from the same issue as ITM Power — unprofitability. However, I still believe it has great growth potential. I think once the demand for hydrogen increases, the market will be eager to find cost-cutting innovations like the ones AFC provide.

Final thoughts

There are a lot of risks in investing in companies like ITM and AFC. Hydrogen is not yet recognised as a highly valuable commodity. But current events in Europe have shown the important role renewables have to play. Not just for the green transition, but security.

Provided the companies can stay afloat over the coming years, hydrogen shares have the chance to explode in value. So I will be adding both ITM Power and AFC to my portfolio.

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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.