We know that babies to enter REM sleep (dream state sleep) because we can see their eyes twitch as they sleep.
In fact they spend over half their time in REM sleep! Way more than adults.
But what do they dream about?
But they lack the head space and the ability to imagine themselves as the heroes of baby adventures, or to dream of toys.
Vivid dreams start at age 7 and 8, when the child can become self-aware, and know that she/he is a person.
In fact, the amount of self awareness— understanding that they would be the same person even if they had a different name, for example — strongly correlates with the amount of plot structure in that child’s dreams.
I think children have vivid dreams a lot earlier because I still remember a dream I had when I was 4 where I was strapped down to a mad scientist’s table and was about to be experimented on.
Reading through the comments, a lot of people report back having vivid dreams at 4 or 5. Perhaps this theory is wrong after all.
I remember I used to have nightmares in preschool where it would be a white plane with a black line traveling in a strait line through it. Then the black line will break and there will be a loud screech.