Passive income ideas: 2 ways I can generate cash from stocks

Jonathan Smith explains a couple of handy passive income ideas that he uses when it comes to the stocks that he’s looking to buy.

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.

Just because I’m a stock investor doesn’t mean I don’t want to think about passive income ideas. Traditionally, investors have looked to bonds as a way of generating cash via the coupons. Buy-to-let properties and high-interest cash deposits are other ways that some people consider. However, I prefer shares and within the stock market there are several ways I can look to generate income.

Dividend income

The main passive income idea when it comes to the stock market is receiving dividends. Dividends are income payments from a company to its shareholders. If I buy shares in a company, that entitles me to receive some of the dividends paid out. 

I need to do my research into the company before I invest, but once I have done so, there’s no more work to do so the income paid is what I would call passive. The dividends are usually paid out a couple of times a year. If I invest in a mix of companies with different reporting periods, I can end up receiving a dividend payment most months in the year.

I can work out how much of this passive income I should get  via the dividend yield. This is a ratio that looks at the share price relative to the dividend per share. This allows me to calculate as a percentage how much my investment amount will make me each year.

Of course, one point to note is that dividends aren’t a guaranteed income stream. As the pandemic showed last year, companies can decide not to pay a dividend for a year if they believe the funds need to be retained for other purposes.

Passive income via trimming profits

Another passive income idea is trimming profits regularly from my portfolio of stocks. Although this method will mean I take more time to start making income, it’s still worth considering.

Using an average growth rate of 8% a year, after a few years, this could give me a profitable portfolio of stocks. What I can do from here is look to trim off a certain amount of the profit every six months or so. This money I’d be taking out is pure profit above what I originally paid in.

For example, let’s say I invested £1,000 in a stock that has risen 20% in value. My investment is worth £1,200. I could take £100 of that profit as income,and leave £1,100 there. In another year, the value might have risen again to £1,200 and I could again take £100 as profit.

The advantage of doing this is that it not only generates passive income, but it also reduces the potential of being overly concentrated in some stocks if the value has shot up. The disadvantage is that by selling some shares, if the share price continues to go up in value then my future profit could be less than if I’d left it all in there. 

My point is that there are different passive income ideas I can work with from stocks, giving me plenty of flexibility.

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 considered so you should consider taking independent financial advice.

jonathansmith1 has no position in any share 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.

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