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The stock investing strategy I’d use to generate a passive income

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Stock investing is one strategy that can be used to generate a passive income. 

A passive income is defined as money that requires little or no effort to earn. Many assets can be used to achieve this goal. Some come with more risk than others, which means they may be more suitable for different investors. 

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Stock investing can be quite risky and may not be suitable for all investors as a way to generate a passive income. However, I’m quite comfortable with the level of risk investing entails. That’s why I’ve acquired a portfolio of stocks and shares with the single goal of generating a steady, hands-free income stream. 

Stock investing strategy

I own a mix of high- and low-yield shares for my passive income portfolio. I believe this combination offers the best of both worlds. That’s because companies with low dividend yields tend to have more headroom to increase their distributions over the long run. Meanwhile, high-yield shares can lack this flexibility, but the more generous yields are understandably appealing.

I’m comfortable with this portfolio mix based on my experience. But I’m well aware that just because a company has a low dividend yield doesn’t mean the payout is more sustainable. As for high-yield shares, if an organisation supports a dividend yield that’s noticeably higher than the market average, it can be a strong sign the market doesn’t believe the payout is sustainable. 

A yield only gives us some indication of a firm’s income potential. It’s not a guaranteed payout. That’s one of the reasons why investing in stock and shares may not be a suitable passive income strategy for all. 

Passive income picks 

Blue-chip income champions such as British American Tobacco and BP are some of the companies I’d buy for my income portfolio. Shares in these organisations offer dividend yields of between 6% and 8%.

These are some of the highest yields in the FTSE 100, which could be a warning sign as I mentioned above, although I believe the payouts are safe for at least the next 12 months. After that, it’s a bit harder to tell. Nothing is ever guaranteed in the stock market. There may also be ethical reasons why investors may want to avoid these businesses. 

Alongside these blue-chips, I’d also consider mid-cap stocks such as LSL Property and CMC Markets. These stocks currently support dividend yields of 4.3% and 3.4% respectively. Unlike the blue-chip companies outlined above, both groups are still relatively small players in their sectors.

I think that leaves plenty of room for future growth, supporting dividend expansion. Of course, growth isn’t guaranteed at either business. Their respective management teams may have their work cut out to grow in the viciously competitive property and financial services markets.

Still, as passive income investments, I’d acquire these stocks. But I’d also keep a close eye on their growth efforts.

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Rupert Hargreaves owns shares in British American Tobacco. 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.

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