3 ways to invest £1,000 for passive income

Paul Summers looks at a trio of strategies to invest £1,000 if he were looking to generate passive income from his portfolio.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There’s no ‘right’ way to make money in the stock market. However, one relatively fuss-free way of doing so is to focus on generating passive income. This can be achieved through buying stocks that pay dividends. Today, I’ll be looking at three approaches I could take if I were looking to invest £1,000.

1. Invest £1,000 in dividend stocks

One way to invest £1,000 for income would be to buy individual company stocks. Fortunately, there are plenty of UK shares offering bumper yields right now. FTSE 100 power provider National Grid returns 5.3%, for example. Insurer Legal & General yields 6.4%! That’s far more than I’d get from even the best Cash ISA. 

There are other positives. One of these is the lack of ongoing costs. Once shares have been purchased, the only fees are those charged by the online platform investors use for maintaining their accounts.

That said, I think this is the worst way of generating passive income with £1,000. It simply isn’t cost-effective to build a portfolio of, say, 10 stocks with this amount of cash. Too much money will be taken up in commission costs when buying the shares. 

This being the case, it probably makes more sense to buy, say, two or three stocks. A consequence of this approach, however, is that my money is now overly concentrated. In other words, I’m now dependent on a small number of companies sending me dividends. It’s the equivalent of placing all my eggs in too few baskets.

Thankfully, there are other options.

2. Buy an active fund

An alternative would be to invest £1,000 in an actively managed fund. This puts my money in a larger number of income-generating shares, thereby making it significantly less risky. If a few holdings are required to cut payouts due to poor trading, the remainder should offset this. 

There are additional benefits to this approach beyond diversification. Having a fund manager work on my behalf would appeal to me were I a ‘hands-off’ investor. Theoretically, this person should be more skilled at selecting the best income stocks thanks to their knowledge and experience. Popular picks include the Threadneedle UK Equity Income (2.7% yield) and Jupiter Income (2.9% yield).

Unfortunately, a big drawback to this approach is the management fees. The more I have to pay out to the manager, the less income I’m able to enjoy (or reinvest). 

3. Buy an exchange-traded fund

A final option for generating passive income — and my personal favourite for a pot of £1,000 — is to buy an exchange-traded fund. In contrast to those above, this kind of investment vehicle doesn’t require active stock-picking. Here, we simply track an index of stocks, such as the FTSE 100.

An exchange-traded fund doesn’t aim to beat the market. Instead, it provides the same return, minus fees. Importantly, it can also provide a dividend stream to investors. A drawback of this is that the yield won’t be as high as I might get from individual stocks (currently around 2.8%). However, the lower fees and ‘safety in numbers’ approach help to make up for this. 

Of course, investment is never completely passive. This approach still requires me to select which fund to buy and which index to track. That index could also go through a rough time, temporarily reducing the value of my holding. Even so, I do believe this offers the best risk/reward trade-off if I were looking to invest £1,000. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

The Standard Chartered share price leaps on FY dividend and buyback news. Time to buy?

An 8% jump for a UK-listed bank on 2023 results? That's what just happened to the Standard Chartered share price.…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Can Lloyds shares get any cheaper?

Lloyds shares have fallen further following the release of the bank's 2023 results. This Fool senses now is a time…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£7,000 of money to spare? Here’s how I’d aim to turn that into £1,000 in annual extra income

Christopher Ruane explains how he would aim to generate a four figure income to cushion his future, all with dividend…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Is this stellar dividend growth stock the only no-brainer buy on the entire FTSE 100?

Picking shares requires careful thought and analysis, but this FTSE 100 growth stock appears to be pressing all the right…

Read more »

Investing Articles

I bought 422 Glencore shares in July and 232 in September. Here’s what they’re worth now

Glencore shares have had a rough ride leaving Harvey Jones out of pocket. Should he cut his losses or average…

Read more »

Man smiling and working on laptop
Investing Articles

Here’s why I’m investing most of my savings in FTSE 100 shares!

I think investing in FTSE 100 shares is one of the best ways that UK investors can make long-term returns.…

Read more »

Newspaper and direction sign with investment options
Investing Articles

When cheap markets meet favourable conditions, sentiment flips very quickly

London’s stock market is cheap — some sectors, even cheaper. Given a change in sentiment, the uprating could be substantial.

Read more »

Investing Articles

Empty Stocks and Shares ISA? I’d snap up these 3 stocks to start with!

Sumayya Mansoor explains how she would start to build wealth from scratch with an empty Stocks and Shares ISA and…

Read more »