A passive income is generally defined as an income stream that does not require extra work. There are many different ways to earn a passive income stream. There’s no one-size-fits-all structure, and some of these methods might not be suitable for everyone. I’m using UK shares to build a passive income because I’m entirely comfortable investing in the stock market. Other investors might not be comfortable with this level of risk.
Likewise, I’m not particularly excited about buy-to-let property investing for myself. That doesn’t mean it’s not a good way to generate income. Indeed, over the past few decades, thousands of individuals have earned a passive income from rental property. I just don’t think I know enough about the industry to take the leap.
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Book and music royalties are other passive income alternatives, although as I’m not an author or musician, don’t think it would be a good use of my time to pursue this path.
That’s why I’ve decided to build a passive income with UK shares. I know the stock market’s ins and outs, and I’m prepared to deal with the uncertainty in both the short and long term that comes with owning public equities.
Buying UK shares
One of the main reasons I favour stocks and shares over other passive income alternatives is flexibility. For example, right now, I can go out and invest in some of the world’s largest companies, across different sectors and industries, at the click of a button.
Of course, going out to buy shares without any research isn’t a sensible investment strategy. So, before I click ‘buy’, I try to understand what I’m planning on buying and why I want to acquire it.
Another reason why I favour stocks and shares is the fact that there is never any obligation to buy a stock. If I don’t like the look of a company, I can avoid it. It is as simple as that. I’m more comfortable owning some businesses compared to others.
Put simply, I only want to acquire UK shares that I think will meet my passive income goals.
Passive income goals
For a business to make it into my portfolio, it has to have several qualities. The company must have a strong balance sheet, a good dividend track record and international diversification.
These qualities by no way guarantee that a business will be a good investment, but I think they help narrow the field. Past performance can be a poor guide for future potential, so I try and keep an eye on how companies perform on a regular basis as well.
Some businesses that I feel meet these criteria include consumer goods giants Unilever and Reckitt Benckiser. Both of these companies feature in my passive income portfolio.
One organisation that I have also been eyeing up is GlaxoSmithKline. I’ve not acquired this stock yet, but the company has maintained its dividend for the past five years (although its share price is currently no higher than it was five years ago). Although that track record does not guarantee the payout, it suggests to me that it might be worth taking a closer look at this pharmaceutical business as an income investment.