3 strategies I’d use to generate a passive income

Rupert Hargreaves takes a look at three passive income strategies he’d use to help improve the returns on his portfolio.

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Investing in stocks and shares is a great way to generate a passive income. Indeed, unlike other methods of income generation, which can demand hundreds of thousands of pounds of initial investment, anyone can get started investing in the stock market from just £50 every month. 

There are also plenty of strategies I can use to generate income from the market. Each of these has its benefits and drawbacks, so some may be more suitable for investors than others. 

However, they’re all designed with one overriding outcome in mind. Generating a passive income.

To minimise the risk of failure, I’d use a combination of all three in my portfolio. As dividend income is paid out of company profits, it can never be guaranteed. Therefore, using a mix of strategies can reduce the risk of dividend cuts impacting my income. 

Passive income strategies

The first strategy is to buy a basket of high-income stocks. These could include companies such as Legal & General and British American Tobacco. Both of these stocks support a dividend yield of around 7%, at the time of writing. 

The one downside of using this approach is that high dividend yields can often signify the market doesn’t believe the payouts are sustainable. As such, while the market-beating dividend yields of 7% might be appealing, there’s no guarantee they will be around forever. 

So that’s one passive income strategy. Another I’d use is to buy dividend growth stocks. These are companies that are reporting steady growth and are, as a result, able to increase their dividends gradually every year. 

Two fantastic examples are healthcare company Hikma and publisher Bloomsbury. Each of these shares has increased its dividend steadily over the past six years.

Bloomsbury’s per-share dividend has increased 40% since 2017 as the company’s net income has nearly doubled. As long as both businesses continue to report steady earnings growth, this trend should continue. 

The one challenge is finding companies that can grow year after year. Hikma and Bloomsbury have achieved this goal so far, but there’s no guarantee they’ll continue to do so. 

Capital growth 

The final passive income strategy I’d use doesn’t rely on dividends. Instead, the process is based on finding high-growth businesses.

As these businesses increase profitability, their share prices should follow suit. And, as the share price increases, I can sell some shares every year to generate an income from capital growth. 

This strategy requires a bit more activity than just sitting back and collecting dividends, but it produces the same results. Some examples of companies that have achieved strong capital growth over the past few years include JD Sports and Games Workshop. That said, past performance should never be used as a guide to future potential. 

I think using a combination of these three passive income strategies could be the best approach to generate an income from the stock market.

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.

Rupert Hargreaves owns shares of British American Tobacco. The Motley Fool UK owns shares of and has recommended Games Workshop. The Motley Fool UK has recommended Bloomsbury Publishing, British American Tobacco, and Hikma Pharmaceuticals. 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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