I have been thinking about what passive income ideas I can use in 2022 and beyond. One source of unearned income I like is investing in dividend shares. I can sit back and hopefully watch the dividends pile up. With a modest sum to invest, I would only expect a fairly low amount of income in return. But that is better than nothing – for doing almost nothing.
British American Tobacco
Many investors shun tobacco stocks for ethical reasons. But as someone willing to buy them, I think such stocks can offer attractive returns.
A case in point is London-based giant British American Tobacco (LSE: BATS). The company owns brands such as Lucky Strikes and operates worldwide. Its portfolio of premium brands gives it pricing power. That can help sustain profit margins in a time of high inflation.
One risk to the company is declining rates of cigarette smoking in many markets. That could bring revenues and profits down in the long term. BATS has been developing alternative revenue streams, for example building its line of next generation products in areas such as vaping. That could help to replace disappearing cigarette sales, although for now at least the profit margins are lower.
Despite the challenges, BATS continues to be highly cash generative. It pays four dividends a year, and has raised the payout annually for over two decades. At the moment the shares yield 7.3%. That means if I invested £250 in BATS shares today, I would hopefully receive just over £18 of passive income in the coming year alone.
M&G
My second choice would be asset manager M&G (LSE: MNG).
The company specialises in investment management. I like that as a business area because it can be very lucrative. The large sums involved mean that even a modest commission for the company can be a sizeable amount of money in absolute terms. M&G’s established brand name and reputation are a competitive advantage which can help it win new clients.
The company is committed to maintaining or increasing its dividend, although like all dividends there is no guarantee in practice that that will happen. Currently, the shares yield 8.6%. So if I invested £250 into M&G shares today, I would hopefully receive a little over £21 in passive income across the following 12 months.
There are risks with a company like M&G. For example, turbulence in stock markets can affect investment returns. That may lead to clients placing their business elsewhere, reducing M&G’s revenue and profit.
Putting my passive income ideas into action
The thing about passive income ideas is that they will not generate any money at all if they remain only as ideas. To start making money, they need to be put into action.
I already own British American Tobacco shares and am happily receiving regular passive income from them. I would gladly invest another £250 in BATS shares today. I would also consider buying M&G for my portfolio to further boost my income streams, even if only in a modest way to begin with.
