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3 ways I can try to make passive income from stocks in 2022

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Passive income from investments allows me to spend my free time focused on other activities. Making this type of money can be done in a variety of ways, including property and bonds. Another option is to use stocks to achieve my passive income goals for the coming year. Here are a few ways I can do this.

Picking a dividend share (or more)

The first way is simply to buy a stock that pays out a dividend. Holding one stock isn’t always the best idea (more of that later), but it if I’m limited on cash or have other investments, I might decide just to own one. In this case, I can look at a list of the stocks that currently pay out a dividend and select my favourite.

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In terms of what might make a stock my favourite, there are various points worth considering. To begin with, the dividend yield is important. This helps me to rank the stock in comparison to others. I also need to look at the company and what it does. Is the business performing well? Is the industry likely to grow in 2022 and beyond? This will help me to assess the viability of the passive income further down the line.

As mentioned, holding one stock alone for passive income can give me headaches. For example, if the company stops paying a dividend, my entire stream of money will cease.

Therefore, a second option is to buy a selection of different shares to hold as an income portfolio. I can still go through my same thinking as above. But the main difference is that I’m more diversified in my holdings. This means that even if one company performs badly, my passive income will continue via the other stocks. It also helps me to reduce the overall volatility of any share price fluctuations as well.

Regularly trimming profits for passive income

Another way I can look to create passive income is by looking to trim profits from investments that have gone up in value. For example, I could have bought a stock last month that’s doing well. By next summer, I might be up 10%. If I invested £1,000, this would make the share value £1,100. At this point, I can look to sell £100 worth of shares.

In this way, the £100 acts as income and I can do with it what I want. The remaining £1,000 still matches my original investment amount. I can leave this in the company to hopefully see further appreciation in the future.

The risk for this method is that my passive income is dependent on share price performance. If the stock doesn’t gain in value, then I can’t trim any profits. 

So on balance, I think the most sustainable way for me to make passive income from stocks is to use a blend of both dividends and profits. This should help me to enjoy a more consistent form of income going forward into 2022.

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jonathansmith1 and The Motley Fool UK have 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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