Passive income ideas can help one get money without having to work for it. From letting property to owning shares, there are lots of ways in which one can supplement actively earned income.
Putting aside some money each month to invest in a passive income idea can help create a revenue stream. That is because a lot of shares pay dividends, which are payments to shareholders while they hold the shares. It’s basically like becoming a part owner of the business, and getting a slice of the profits several times a year without having to do any of the work.
With £500 a month invested in a Stocks and Shares ISA, I think it should be possible to create a passive income stream in a matter of months.
Finding passive income ideas
When scanning the stock market for passive income ideas, I look at how much income I expect a company to generate in future.
A company which is still investing heavily in new technology or building its business, such as Ocado, may not produce enough income to pay dividends. That doesn’t necessarily make it a bad investment. But it does mean that it isn’t likely to supply me with passive income any time soon.
By contrast, a well-established company in a mature industry may be able to generate substantial surplus profit. It can return that profit to shareholders as dividends. For example, Imperial Brands is mostly focussed on selling cigarettes. While it does have some next gen products, cigarettes don’t require large research or capex investment at this stage in their product cycle. So the company can pay out a lot of money as dividends – last year, Imperial paid out £1.3bn in dividends to shareholders.
But one of the downsides of a mature industry is that it could decline, or returns could shrink. For example, in many of Imperial’s key markets, cigarette consumption is set to fall. It can compensate to some extent with price increases. But over time, falling demand could equal falling profits.
Pick and mix
That is one reason I try to spread my investments over multiple shares. That provides some diversification, so that even if one share performs worse than I hoped, I can still hope my passive income ideas will pay out over all.
Some companies in the same industry may be better than others, but all could be affected by a downturn. So I don’t just diversify between companies, I also make sure to use passive income ideas in more than one sector. £500 a month is substantial enough to enable me to diversify between different passive income ideas before long.
Future income growth
Any passive income is welcome for me. But if I was looking at different jobs, I’d consider whether the wages might rise in future or would stay the same. I think it makes sense to do the same with passive income.
For example, some companies have a long history of increasing their dividends. DCC has raised its dividend annually for over a quarter of a century. Dividend history doesn’t necessarily indicate future payouts. But a company with an ethos of growing dividends often prioritises dividend payouts and considers how to grow dividends into the future. That is why companies with long dividend growth histories rank highly among my passive income ideas.
