Investors could use many different assets and strategies to generate a passive, monthly income. Some of these require almost no effort, while others can be a bit more challenging.
Many investors have turned to buy-to-let property in the past, but this is not without its problems. Rental properties can be expensive to maintain, and it may only take one bad tenant to eliminate profits. Owning a small business is another strategy, although this does require additional time and effort. That being said, it can be a highly lucrative strategy if done right.
However, the approach I would use to generate a monthly passive income is buying UK shares. By following this strategy, I believe I can generate a passive income while investing in the businesses I use every day. There may also be the potential for capital gains in the long term.
Passive income investments
Unlike other passive income strategies, by acquiring a diversified portfolio of UK shares, I think I can build a steady, growing income from some of the world’s largest businesses.
I would target a certain type of company for an income portfolio. Many of the corporations listed on the London stock market offer dividends, but not all of these businesses are worth buying in my opinion.
Avoiding companies with the highest dividend yields is usually a good place to start. A higher than average dividend yield is usually a sign the market does not believe the payout is sustainable.
Instead, I would focus on companies with average level dividend payouts and, perhaps more importantly, a high level of dividend cover. In my opinion, businesses in defensive sectors also make the best dividend investments. Two great examples are pharmaceutical groups GlaxoSmithKline and Hikma.
Other companies that I would consider buying for a passive income portfolio include financial services group IG and mining businesses BHP and Rio Tinto.
Diversification
A quick way to build a diversified dividend portfolio is to buy an investment trust. I’m a big fan of investment trusts and believe they make the perfect passive income investments.
The City of London Investment trust is an excellent example of why these vehicles are excellent income investments. It currently offers a dividend yield of more than 5% and has a track record of increasing its payout every year for the past four decades.
Using investment trusts such as City of London, as well as a diversified portfolio of UK shares is, I believe, the best way to generate a monthly passive income. Buying investment such as those listed above is relatively straightforward and, unlike buy-to-let property, does not require tenant management. All these companies are managed by experienced individuals, who can do the work on behalf of investors. All one has to do is sit back and watch the money roll in.
