Passive income means receiving an income from an investment without needing to do regular work. For me, it’s a good way to save for the long term and provide an immediate boost to my earned income.
The three passive income ideas I’m going to look at today are all suitable for small, regular investments.
#1: Keeping it simple
The simplest, cheapest, and probably safest passive income investment I can find is a FTSE 100 index tracker fund.
During the dark days of 2020, many companies suspended their dividends. However, even then, the FTSE 100 index still paid out a worthwhile dividend yield.
Today, the FTSE offers a forecast yield of around 4%. Although individual companies may have to cut their payouts from time to time, this overall yield comes from nearly 100 companies. For this reason, I think it’s safer than any individual dividend payment.
Investing in a low-cost FTSE 100 tracker is ideal for small regular investments. I’d be happy to buy the FTSE 100 for a passive income. The only real problem is that I know that much higher yields are available elsewhere.
#2: A high-yield fund
Another fairly simple option would be to invest in a high-yield fund. These invest in bonds or shares that have been chosen by the fund manager to provide an above-average income yield.
One fund I like is the Artemis High Income fund, which currently offers a yield of around 5.9%. This fund invests in both bonds and high-yield dividend shares in order to provide an attractive income.
The main risk with this kind of actively managed fund is that it could underperform the market, if the manager makes poor decisions.
However, one attraction of this particular fund is that investors can choose to receive income monthly. This isn’t possible with shares or index trackers, which usually pay twice per year. For this reason, I might consider a fund such as Artemis High Income if I wanted to maximise my upfront income.
#3: Dividend shares for passive income
As a keen stock market investor, the choice I’d probably make is to invest directly in high dividend yield shares.
This approach requires much more detailed research and requires me to keep an eye on the performance of my companies. It’s not a completely hands-off choice, but as I enjoy investing, that’s okay with me.
If I was investing £50 per week, I’d start by choosing 10 FTSE 100 stocks with high dividend yields. I’d then aim to gradually build them into a mini portfolio, pooling my money to invest £500 every two or three months. This would help minimise the impact of trading fees.
For a reliable high income, my picks would probably include companies such as British American Tobacco (6.7%), insurer Phoenix Group (8%), utility National Grid (5.2%), Tesco (4.8%), and Vodafone (7%).
With this approach, I’d expect to be able to build a solid portfolio with an average yield of around 6%.
After that, I’d look at adding some additional stocks to improve the diversification of my portfolio. I might also focus a little more on dividend growth for these additional stocks, to try and make sure my passive income would keep pace with inflation.
