A damning IPCC report out on 9 August said the world should expect more extreme weather events like droughts, hurricanes and rising sea levels. This is “code red for humanity”, one United Nations chief said.

So I’ve identified two UK energy stocks I think could help the world solve the water and energy crises we all now face.

MTI Wireless Edge

AIM-listed Israeli firm MTI Wireless Edge (LSE:MWE) builds and supplies 5G wireless antennas for satellites. So why is it in my UK energy stocks list? Well, its water and irrigation subsidiary Mottech Water Management Systems has expanded in Canada. And it has announced a three-year, £175,000 service contract with a “major Canadian city [which has] one of the largest municipal water irrigations systems in the world”.

With wildfires raging and extreme temperatures becoming more common, I see much greater demand for these products in future.

I’ve owned MTI Wireless Edge myself in the past, and sold it for a decent profit. I think now might be a good time for me to buy back in, given the health of the business and its international expansion. 

Q1 results to 31 March 2021 showed profit before tax was up 25%, with earnings per share up 20%. There are still risks though. MTI will need to keep investing heavily in its irrigation control systems, which will be costly.

UK energy stocks 

One way to spot potential future stars in UK energy stocks is to watch when institutions buy in. Altair Group Investment picked up 146 million shares in EQTEC (LSE:EQT) in June. The venture capital giant now owns around 20% of the company. 

EQTEC’s engineers design and build gasification facilities of up to 30MW. These energy plants can process waste materials like forest wood, vegetation and agricultural waste to produce synthetic natural gas or biofuels. 

In May, the company said it had acquired a plant in Italy that could turn waste products into energy with no hazardous emissions. If successful, such energy sources will be critical for the planet in the coming decades. 

The downside

Rich investors in venture capital take on big risks by investing in early stage UK energy stocks. An investment here could just as easily go to zero as anywhere else. And the company has raised money from the market recently, diluting early shareholders. This is a business with costly R&D, so it may well happen again. 

On a brighter note, the £109m company says it expects to become profitable for the first time with FY2021 results. Revenues should grow from €2.2m to €15.5m with a net profit of €3.2m. For FY2022 the business has set even more ambitious revenue and profit targets of €54.9m and €8.25m

Still, if the company fails to reach this high bar, the share price could collapse. 

Benjamin Franklin said nothing is certain in life, except death and taxes. To that aphorism I think we should add climate change. Investing in UK energy stocks could help insulate me and my loved ones against the worst of what’s to come, and help the planet too.

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Tom Rodgers has no current position in 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.

HSBC said in first-half results released on 2 August that its profits had doubled to $5.5bn. 

The bank has also reinstated the interim dividend it was forced to shelve during the coronavirus pandemic. At 7 cents a share (around 5p) given today’s HSBC share price, it’s a yield of around 2.7%. That’s not massive. But the bank’s CFO Ewen Stevenson said this week the multinational was “well placed to fund future growth and step up capital returns”.

More for me

In other words, HSBC is planning to improve its per-share dividend in future. Back in 2018, HSBC offered shareholders 51 cent per share (36.6p) annual payout.

If it could return to those halcyon days? Based on today’s much lower HSBC share price, it would mean a whopping dividend yield of close to 9%. This might well be wishful thinking given the uncertain state of the economy. But half that amount? Anything close to 5% in the medium term would be a great portfolio boost for me. 

Analysts at Credit Suisse added this week that they expect HBSC to start $1bn of share buybacks. That’s when a business buys its own shares in the hope of improving the value of those held by other shareholders. 

So for the first time in a long while, being a big bank shareholder seems a happy place to be. 

Speaking to Bloomberg, Stevenson added the bank had seen strong growth in its loans division. Long-term growth here could improve the HSBC share price.

HSBC share price inflation?

Some economists predict that world economies are heading for a period of stagflation. That’s when prices for food, fuel, medicines and other household staples rise while the economy fails to grow. This could be a major issue for the HSBC share price.

If that happens, it’s likely businesses and individuals will be more fearful of taking out loans in the amounts HSBC needs to keep its profits up. 

Because the bank is diversified across the globe — certainly more so than the likes of UK-focused Lloyds Bank — it is more insulated to economic shocks in one region.

That said, HSBC creates most of its annual revenues from Asian centres like China and Singapore. A surprise economic downturn there could play poorly for shareholders.

What to watch

Other issues could weigh on the HSBC share price. First of all, throughout the Covid-19 lockdowns, many households managed to save up more cash that usual. I certainly did, because my usual costly habits of pubs, golf clubs, and garden centres were all shuttered. 

At the same time, banks like HSBC set aside mountains of cash to cover expected bad debts, which never came. 

Managers being able to remove those debt limits has contributed to the stupendously high bank earnings we’ve seen this financial quarter.

And of course, there is a risk that we won’t see these kinds of profits again any time soon. HSBC won’t be able to rely on such a perfect storm of economic conditions again. It’s something I’ll watch very closely if I decide to buy shares here. 

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Tom Rodgers has no position in HSBC. The Motley Fool UK has recommended HSBC Holdings. 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.

More importantly, this story is tangled up with some fascinating facts about the company that became Buffett’s best investment.

Warren Buffett: storyteller

At a University of Florida event, Mr Buffett was asked what seemed to be quite a simple question. Are there any benefits to not being on Wall Street when it comes to investing?

“The disadvantage of being in any type of market environment is that you get over-stimulated,” he said. “You think you have to do something every day.”

There are some companies in my portfolio that I’ve held for years, for instance Sylvania Platinum. And there are others I really wish I hadn’t sold. Like Frontier Developments or Team17. Just like Warren Buffett said, I got over-stimulated. I made a few quid on these UK AIM shares, and sold out, thinking I was a trading genius. Of course, because I picked good companies at the time, they have continued to rise.  

In other words, Warren Buffett also said: “What you are looking for is a way to get one good idea a year. And then ride it to its full potential. That is very hard to do in an environment where people are shouting prices back and forth every five minutes and shoving reports in front of your nose. Wall Street makes its money on activity. You make your money on inactivity.”

My conclusion? Sometimes inactivity — doing nothing — is my best way to make money. 

Bubbling up

Have you ever heard the name Asa Candler? He was a pharmacist by trade, living in Atlanta in 1888. He met John Smith Pemberton, a former army veteran, who had developed a sweetened soft drink he thought could be mass marketed. Candler bought the rights for a total of $2,300. Today that sum would be worth around $65,000 or £45,000. 

Over the course of the next three decades, Candler developed the drink. He advertised it as a headache cure and a relief for mental fatigue. After 20 years on the market, he agreed to remove the cocaine that formed a large part of the recipe. This, of course, was Coca-Cola. 

In 1919, with the First World War only just over, and stock in the company worth approximately $25m, Candler decided to hand it over to his children. They, in turn, decided to cash in their riches. All $400 million of it. A great decision, right?

Much more

If the family had taken Warren Buffett’s advice and done nothing, they and their grandchildren would be sitting on a fortune 61,400% larger, at $246bn.

Through Berkshire Hathaway Warren Buffett began buying Coca-Cola stock in 1988. It remains his longest-held stock pick and indeed his best, with the stock up more than 2,000% over the last 33 years. 

Finding great stocks that are undervalued is a lifetime’s work. However, Buffett said: “You don’t have to do much else if you pick one of those. And the trick then? Not to do anything else.“

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Tom Rodgers holds shares in Sylvania Platinum. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has recommended Frontier Developments and has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). 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.

Should I sell a stock when it has fallen, to cut my loss? When it has gone up, to lock in a profit? Or should I sell a stock when it has not moved at all, because all my friends are getting rich on meme stocks like AMC or Gamestop? 

The Oracle of Omaha has the answer. 

The wisdom of Warren Buffett

At a University of Florida talk in 1998, Warren Buffett gave a room of MBAs some advice that was worth its weight in gold. It’s an apt metaphor, because in the last 23 years, the price of gold has increased from $500 (£350) an ounce to $1,800 (£1,280) an ounce. Holding the precious metal would have nearly quadrupled my money in that time. 

Buffett told the room: “One of the most important things is that a stock doesn’t know you own it. You have all these feelings about it, you remember what you paid, who told you about it. And it doesn’t give a damn.”

Investors spend far too much time worrying about what they paid for a stock. Whether the price moves up, down or sideways from when I bought it? This shouldn’t impact on my decisions at all. 

So when should I sell?

When the story changes

If a business becomes fundamentally less competitive, it might be time to sell, Buffett says. That could happen if my company loses market share to a better rival. Or perhaps if it loses patent-protection for its biggest earner. 

Peter Lynch, author of One Up on Wall Street, offers the same advice as Warren Buffett.

Lynch says: “You can’t get too attached to a stock. You have to understand there is a company behind it. If the company deteriorates and the fundamentals slip, you have to say goodbye to it.” 

When you’re overweight

I’m not having a go at anyone’s waistline, here. Overweight, in this context, means that you have too much money in one single stock. 

Having the courage of one’s convictions is a good thing. And Warren Buffett famously said “diversification is protection against ignorance”.  But in the late-1960s, with $500m under management, Buffett set a limit of 40% in any single stock. When he hit that maximum, he sold some stock.

When a better opportunity appears

For the first 20 years of his investing life, Warren Buffett says his decision on when to sell a stock was “always based on the fact that I found something else I was dying to buy.”

I don’t have infinite cash to invest. By picking one stock to invest in? I’m automatically locking out about five other great ideas. 

Buffett says: “The real cost of any purchase isn’t the actual dollar cost. Rather, it’s the opportunity cost—the value of the investment you didn’t make, because you used your funds to buy something else.”

Abandoning a company I really like is a hard decision. But it should come when I’ve found another business I think will give me a better shot at future riches.

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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has no position in 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.

When I covered ThinkSmart (LSE:TSL) back in June, I said that I thought it was a great British share trading at a massive discount. At the time, TSL shares were trading at 66p each. That gave the Manchester company a total market cap of around £70m.

Unfortunately, I didn’t have the cash to buy it at the time, but anyone who did is likely to be grinning smugly now. A £5,000 investment in June would have netted me £2,500 in clear profit now after the share price jumped on Monday.

So what’s the big news that has seen ThinkSmart shares rocket 50%? It’s actually to do with events far away linked to Square taking over Afterpay. 

ThinkSmart thinks smart 

First, some background. ThinkSmart’s business doesn’t look great on the face of it. The financial technology firm has posted declining revenues every year since 2016. The amount of money it has made through sales every year has halved in the past five years. 

And CEO Ned Montarello told shareholders in the most recent financial results that the company was making a bold move. It would stop its biggest earning activity to date: renting out electronic equipment to retail customers. 

But an investment in ThinkSmart is effectively a bet on the continued popularity of another company entirely. 

In 2018, TSL sold 90% of its buy now, pay later platform Clearpay to the Australian giant Afterpay. This service allows customers to split their payments for products they buy into monthly instalments. It’s particularly popular among younger consumers, who are used to having an item today and paying it off over time. And this technology development proved a very big earner for ThinkSmart. Especially since it retained 10% of Clearpay. That’s the part of the business that investors are really interested in. Afterpay has grown into a £33bn company. So the bigger Afterpay gets, the more ThinkSmart should be worth. 

In  full-year results to 31 December 2020, TSL’s Clearpay holding was valued at 109.4p per share. At the time, that represented a 40% discount on the ThinkSmart share price. 

Squaring the circle

On 2 August, payments giant Square — the other company run by Twitter CEO Jack Dorsey — announced it was buying out Afterpay. 

That put a rocket under the ThinkSmart share price, sending it shooting up 50% or more in a day. 

Square will pay $29bn for the Australian business. The US firm said it would integrate Clearpay into its suite of financial apps. So every merchant who uses Square will be able to offer a buy now, pay later option at checkout. 

The market cap of the AIM-listed business has shot up to £100m as of 2 August.

Small AIM-listed companies are usually a risky bet. And not all of such investments come to fruition. So I’d never buy AIM shares indiscriminately in the hope that one might get bought out. I could be waiting a very long time for that to happen. 

But by investigating smaller companies with big value propositions — as I suggested ThinkSmart had — I could be on my way to investing riches. And another lesson I’ve taken from this is that I need to keep some cash in reserve for opportunities I think could yield rich rewards in future!

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Tom Rodgers has no current position in 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.

FTSE 100 shares rarely make my best shares to buy now watchlist. But there is one £5bn+ company that has shot to the top recently. 

Growth is usually at a premium for blue-chip giants. But the FTSE 100 company in my best shares to buy now file has produced some pretty epic operating profit growth. 

Cash machines

My best shares to buy now often have high operating profit growth. Why? Well, to me, it is a much more useful way of valuing a business than using headline or gross profit. Say my company sells 1m widgets a year at £10 a go. My production costs are £5 per widget. Gross profit would be £5m. But that doesn’t account for all the other costs of doing business, like marketing the widgets for sale, doing R&D on the hot new trends in widgets, paying for staff, expanding into new markets and everything else you can imagine. 

After all that, my company could be making a loss for the year. It certainly wouldn’t make anyone’s best shares to buy now list! If a business has good operating profit growth, I know it is not only selling a decent amount of its product but also has a firm hand on controlling costs. To me, that suggests sustainable growth over the longer term. 

Going postal

Honestly, I never thought I’d have Royal Mail (LSE:RMG) on list of my best shares to buy now. This time last year, the FTSE 100 postal service was at the bottom of a two-year share price decline under CEO Rico Back. It had plummented from 559p to 126p. 

Former Ocado exec Simon Thompson took the top spot in January 2021 and has had an immediate impact.  

Profits soared in the pandemic, up 116% in the year to 28 March 2021, as it won government contracts to deliver coronavirus testing kits. And operating profit growth? Up 416%. 

The obvious risk for its status as one of my best shares to buy now is if Thompson can’t keep a good thing going. I find it unlikely that everyone will use Royal Mail to the same extent as during a global pandemic. I think there will be some residual growth, however. My elderly parents started shopping online for the first time last year and won’t give up that convenience now. I see that being replicated throughout the UK, to some extent. 

Spruced up

Many have tried and failed to modernise this over 500-year old institution. Thompson’s move is to build new automated parcel sorting hubs. The first, in Warrington, will open in 2022. The second, an 840,000 sq ft behemoth near Northampton is slated for 2023. While they could improve efficiency, these will be massive capital costs, which could hurt profitability. 

In May 2021 the business started paying dividends again at 10p per share. A progressive policy means it has committed to 20p a share from next year. Again, these are costs that could hurt if the pandemic profit bonanza doesn’t last.

Royal Mail also operates in a world where its rivals like UPS, Fedex, and Amazon all appear to have more nimble business models. So this is a contrarian pick! While it’s one of my best shares to buy now, it may not be one I hold forever. If I buy, I’ll keep watching it like a hawk for any signs of long-term trouble.

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Tom Rodgers has no position in 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.

Novice investors often focus on the best penny stocks to buy now. This usually means shares that are trading for less than £1 each. And it’s not always tiny businesses no one has heard of. 

There are technically two ‘penny’ stocks in the FTSE 100!  

As it happens, both would make my list for the best penny stocks to buy now. Despite a very large debt risk, I think Rolls-Royce remains undervalued. A recent sell-off of foreign liabilities is promising for cost-cutting, too. Lloyds remains a buy for me despite this year’s 30% price rise, because dividends are returning, at an expected 4.4% yield. 

But when I’m looking for penny stocks to buy now I usually only consider small companies – those with a market cap of less than £250m. And I think these two have better prospects than multinational giants. 

Return of the Mac

Shares in McBride (LSE:MCB) have gained a modest 3.5% since I last tipped them in March. That’s not a great return for tying up capital for four months. Buying any penny stock comes with opportunity risk. By buying one, I have to turn down everything else. But I still see long-term upside in Europe’s leading own-brand cleaning goods supplier.  That’s why it makes my best penny stocks to buy now list.

There are concerns: McBride shares crashed more than 25% in a day when it released a surprise profit warning in May. While the share price recovered fairly quickly, profits are expected to be 15% lower this year than in 2020.  

I’m also uneasy about the “uneven levels of demand” mentioned in that trading update. And the fact that the “raw material environment remains challenging” because supplies are less readily available. A price-to-earnings ratio of just 6.2 perhaps reflects this uncertainty.

CEO Chris Smith has, however, moved to raise some prices and slash costs to improve margins. And £715m in sales on a £153m market cap still looks decent value to me in the longer run. 

A generous serving

Long-term recurring revenues are usually a metric that helps a company make my penny stocks to buy now list. I see a lot of potential in £132m market cap construction and energy services group Sureserve (LSE: SUR). 

On 8 July 8 it announced an eight-year, £36m gas servicing and electrical testing contract. That’s with a new client, too. So I can be reasonably confident the business is growing nicely in the medium term. 

Half-year interim results to 31 March 2021 showed some interesting statistics. Operating profits were up 54% to £4.8m and earnings per share jumped 71%. Interim chairman Robert Leggett noted how the business shifted from a net debt position of £3.5m to net cash of £9.7m.

“The immediate future remains uncertain due to the pandemic,” Leggett said. And this is a concern for all my penny stocks to buy now. The shares could tank if Covid-19 gets worse and restrictions are reimposed. 

Its clients remain largely in the public sector and government funding cuts could mean this source of revenue dries up. According to the National Audit Office, 25 councils in the UK are on the brink of bankruptcy. Half say their finances won’t recover until 2025. So this is an obvious concern. 

Still, Leggett said Sureserve’s “substantial order book [provides] good visibility on earnings”. That stronger net cash balance sheet could help it ride out problems in the medium term.

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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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 blockbuster stock market debut may be great for Wise (LSE:WISE), but it’s not so good for investors. And the best shares to buy now, in my opinion, are a world away from the £9bn fintech.

Asset managers like Scottish Mortgage Investment Trust, with enough cash and clout to get in early, have made a fortune. Their method? Buy Wise and flip the shares to the likes of small private investors like me.

CityWire tells how the tech fund doubled its money when Wise arrived on London’s stock market.

According to the FTSE 100 trust’s annual results to 31 March 2021, they made an absolutely killing. Wise made up 1% its £9.2bn NAV. Since then it has doubled to £18.1bn.

Best shares to buy now

An old boss of mine — now the CEO of an AIM-listed company — gave me some great advice back in the day. “If everyone else is in the trade,” he mused, “what new information do I have that is going to make me money? What edge do I have?” Can I snap up the best shares to buy now at a much lower price than everyone else? If the answer is no? Don’t invest.

I couldn’t buy Wise shares a year ago when Scottish Mortgage did. At the time, Bailie Gifford’s flagship fund managed to buy Wise when it sold $319m of shares. Again — these were only available privately, to the rich and powerful. 

Instead of focusing on the shares that everyone else is excited about, I buy mine at a discount. Then I simply wait for the rest of the market to realise they missed a bargain. 

Building back better

UK building companies are about to have a stellar year. That’s just one of the reasons why shares in Alumasc (LSE:ALU) are at the top of my list of best shares to buy now. I’ve covered Alumasc once before, in March 2021. I said this £100m micro-cap stock was a great buy for value and growth. In the months since, the building products supplier has grown from 170p to 275p, a tidy 61% profit.

But there’s more to come, I think. A May trading update pointed out: “Following a record first half year performance that saw double digit revenue growth and also a double digit return on sales, it is pleasing to report that this momentum has continued into Alumasc’s last four months.”

Upside/downside

All of Alumasc’s divisions are reporting strong performance. That increased market share, along with “encouraging” export sales to grow overseas business makes the shares a compelling buy for me.

Market conditions could fall off with the end of the stamp duty holiday. And cutting costs by £2.4m has improved margins, but these could fall if increased raw material and shipping costs become the norm. But anyone who has tried to get a builder to do any work will know that supplies are in massive demand. 

If Scottish Mortgage had £1,800 to invest, rather than £18bn, I believe this is what they might do too. The less money we have as investors, the smarter we have to be. Because we have to beat the giants at their own stock-picking game.

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Tom Rodgers has no position in 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’m looking for the best UK stock to buy now. I want to hold it for at least five years. So I need to invest in a highly profitable business.

I’ve got a demanding wishlist. I want a stable, FTSE 100 blue-chip company. I want a good dividend yield now, to compound my cash and make the most of holding long term. I also need to see a very healthy outlook for its sector. 

And the best UK stock to buy now —  for me —  will be a business that can afford to increase dividends in future.  So it must be generating lots of cash to reward shareholders. And it needs enough left over to keep improving and continue hiring the best staff. 

Not many UK stocks can fit this criteria. But I think there is one.

Fishing for profits

Kingfisher (LSE:KGF) was one of the biggest winners from the lockdowns. Its B&Q and Screwfix DIY stores were deemed essential and so stayed open when other stores closed. The massive square footage across the store estate made socially distanced shopping a breeze too. 

The Kingfisher share price bottomed out at around 130p in March 2020 when pandemic panic kicked in. A threefold increase since then surely puts it in the category of the best UK stock to buy last year. But what about now? My first worry is that a 175% share price increase to 360p makes this stock overvalued. But a P/E ratio of 12.8 is well below the FTSE 100 average of 17.3. I think it’s cheap for the value on offer here.

And the outlook? The home improvements market shows no signs of dipping as families splash out on upgrades indoors and out, on garden offices, painting, extensions and more. I say KGF is best placed to win from all of this.

This isn’t just my pick for the best UK stock to buy now, it’s also intensely personal. So there’s a risk I could have my blinkers on. Let me give you an example. 

I’ve just moved into a new house. If I was being charitable I’d say it had ‘lots of potential’. And so I’m racking up massive bills in B&Q every weekend. Why not get something back from all the money I’m putting through those tills?

Numbers up

I found a lot to enjoy in reading Kingfisher’s balance sheet. This isn’t essential, but I do love reading numbers on spreadsheets (and I know, I need to get out more).

Operating profits jumped from £276m to £916m between 2020 and 2021. Tracking return on capital is one of Warren Buffett’s favourite tools, and a way I screen for the best UK stocks to buy now. KGF has improved that metric this year to near all-time highs.

However, profits like this are likely to be a Covid-induced one-off, so I won’t get too excited.    

And while it’s sitting on £1.1bn in cash, net debt of £1.3bn is a concern, although this is vastly improved from the £2.6bn it had in 2018.  

I see today’s 3% yield rising in future. Kingfisher has good dividend cover and is making plenty of money. This is why I think it’s the best UK stock to buy now and tuck away in my ISA or SIPP. 

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Tom Rodgers has no position in 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 know which outcome I’d prefer. 

Not that I don’t love working. As my mum says, “It’s good to feel useful. People have to have somewhere to go every day.” But she would say that. She’s happily retired and splits her time between visiting her grandkids and gardening. Bliss!

Passive income wins

It’s relatively simple to start building up passive income streams by investing in the stock market. There’s a wonderful thing called dividend income, where big companies pay out a percentage of their profits each year to shareholders. The longer I own a solid blue-chip share like GSK or Tesco, the larger shareholding I can build. And the more shares I own? The more dividends I get.  

Compound growth is a virtuous circle. Each year I receive a certain proportion of dividends, called ‘yield’. If it’s a good company, it will try to increase the yield it pays me each year. And if instead of paying my bills with those dividend cheques, I reinvest? I grow my holdings of that business, and get more dividends this year than I had the year before. 

This is a pretty simple rinse and repeat strategy, whether I have £250 a month, £25, or (I wish) £2,500.

Avoid tax

Tax avoidance is perfectly legal. It’s a natural state of affairs to want to work within the system to my own benefit. And happily,  the government recognises that it’s better to get people saving and investing for passive income than not. That’s why they introduced ISAs in 1999. 

Tax evasion, by contrast, which involves trying to conceal income from the taxman, is illegal. Don’t evade tax you owe. And don’t try to hide from HMRC. They will find you.

As part of my tax avoidance plan, I can open a Stocks and Shares ISA and put £20,000 of my income or savings into it each tax year. That way, I’m building up a passive income generator with every year I keep it open. Consistency is the key, really. 

Cornerstone investing

Personally I split my investments into two camps. On one hand I have dependable blue-chip dividend payers. If I had £250 a month to start creating passive income, I’d put around £200 (80%) here. I know these businesses aren’t going to go bust overnight. They’re not particularly exciting. But they are a cornerstone of my investing strategy. 

On the other hand, I allocate 20% to higher-growth, riskier shares. These businesses could go broke, or fail. They are more of a moonshot. But if I know that going in? They are less likely to destroy my passive income plan.  

And I subscribe to a regular investing plan. If money is scheduled to come out of my account each month straight into my ISA? It becomes normal. I don’t miss that £250 a month. Passive income doesn’t have to be complicated. And I can start today.

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Tom Rodgers has no position in the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.