The stock market can be a great way of earning passive income. Through buying shares and waiting for dividends, investors can start generating extra cash without having to do anything.
On 6 April, I’ll be able to start using my new Stocks and Shares ISA contribution limit. And I’ve got a very specific plan for my first £4,000.
Bonus cash
My first order of business is to give myself as much as possible to invest with. That’s why I’m planning to start by depositing £4,000 into my Lifetime ISA (LISA).
Up to a limit of £4,000 per year, LISA deposits are boosted by a 25% government bonus. That will turn my £4,000 deposit into £5,000 in investable cash.
I’ve already done this for the current financial year. But if I hadn’t – and if I had space in my £20,000 ISA limit – I’d look to do so immediately.
With an extra £1,000 to invest, the next job is to figure out what to buy. Dividend stocks can be a great source of passive income, but which ones should I buy?
Building a portfolio
In general, I like to build a diversified portfolio of shares. While it’s impossible to eliminate risk entirely when it comes to investing, I think this helps limit the danger of losing money.
Diversification isn’t just about investing in as many companies as possible. A portfolio with 25 oil investments is arguably less diversified than one with eight stocks from five different sectors.
I also think it’s important for income investors to maintain a long-term focus. This can mean buying stocks that don’t generate huge returns right now, but will do in the future.
With high-yield shares, it’s important to figure out whether or not the dividend is likely to be durable. Otherwise, something with a lower dividend yield that’s growing rapidly might be better in the long term.
Stocks to buy
So, which shares would I buy to build a diversified passive income portfolio today? Four stand out to me at the moment, two from the UK and two from the US.
In the UK, I’m looking at Diploma and Primary Health Properties. The former is a distributor of specialist industrial components and the latter is a healthcare landlord.
Across the pond, renewable energy company NextEra Energy and packaged foods business Kraft Heinz are catching my eye. Together, I think these could form a diversified investment portfolio.
None of these is without risk. A recession could inhibit Diploma’s growth; regulation could cut into NextEra’s profits; rising interest rates could weigh on Primary Health Properties; and increased competition could be a headwind for Kraft Heinz.
By owning them all together, though, I’d hope to limit the risks associated with any of them individually. And over time, I think each could grow into a source of significant passive income.
Investing
With £4,000 to invest, I’d look to put £1,000 into each of the shares I’ve mentioned here. And I’d use the extra £1,000 LISA bonus for an extra £250 of each.
From there, it’s about adding to my holdings regularly. Reinvesting the dividends I receive in the short term should help me build something substantial over time.
