There are all sorts of passive income ideas out there, but some of them are no more than that — ideas. I prefer to use a proven method of generating extra money without needing to work.
That is why I invest in dividend shares.
Owning them can let me earn income without lifting a finger. By investing in high-quality blue-chip companies with a track record of paying out dividends, hopefully I can benefit from the hard work and skills of their workforce.
Past and future
That said, before explaining two such passive income ideas I happily use today, it is worth remembering that past performance is not a guide to what will happen in future.
A strong track record can show that a company’s business model is a proven money spinner. However, circumstances can change. So I pay close attention to what I think might happen in future that could affect a company’s performance.
Even with a portfolio of just a few hundred pounds, I would spread my money across a range of shares. That way, if one of them later cuts its dividend, the overall impact on my passive income streams will be limited.
British American Tobacco
Smoking is waning in popularity and as the years go by, I expect fewer and fewer cigarettes to be sold globally.
For now, though, it remains a sizeable business. On top of that, non-cigarette tobacco products are gaining in popularity. That is good for owners of shares in British American Tobacco (LSE: BATS), which offers a 7.9% dividend yield. With its assortment of famous brands, I think the company could continue to sell a lot of cigarettes in coming years while also growing its alternative business.
Still, cigarette usage declines are a risk to long-term profits. I reckon that risk is reflected in the current share price and yield. I hold the shares in my portfolio.
M&G
Another share in my portfolio is asset manager M&G (LSE: MNG).
It yields 9.8%, making it among the most lucrative passive income ideas of any FTSE 100 share.
Does that yield indicate a risk?
After all, the company made a loss last year and turbulent financial markets could lead customers to withdraw funds. Changing asset values mean the loss does not really reflect the underlying health of the business, in my view. Choppy markets could lead to funds falling, but they may also attract new investors.
With a strong brand, large customer base, and resilient demand for financial services, M&G continues to provide an attractive passive income stream for me.
Dividends as passive income
The risks I mentioned are important not only because they could affect a company’s share price, but a business can also cut its dividend at any point. That helps explain why I spread my portfolio over a range of shares.
That said, as passive income ideas go, I like the simplicity and potentially lucrative nature of owning shares in large companies with proven business models.
With the latest dividends from both British American Tobacco and M&G having been paid in the past fortnight, this approach is working for me!
