To generate a passive income stream, I’d put my first £100 into income shares that offer big payouts.
A steady income is possible, even from an initial £100 stake. And seeing a cash return from my shares within only a few months would be great to help me see what’s possible.
And as long as I can avoid a few common pitfalls, income shares can set me on my way to building wealth and having an income source for life.
Best of all, I can see a couple of reasons why now is a great time to get started.
What is an income share?
So what exactly is an income share? Basically, it’s any company that pays its shareholders a small piece of the profits it makes – called a dividend.
One example is Vodafone, a stock I already own. The company earns over £40bn a year operating mobile networks across Europe, Africa and Asia.
If I own a Vodafone share, then I own a small piece of the company and can share in those profits.
The company has a forward dividend yield of around 8.5%. That means I could put £100 into this income stock now and would expect an £8.50 payout back in the next 12 months.
How to get rich
A £9 return is not bad, but I think of buying income shares to build net worth or get rich – not to pay for a couple of pints.
So where this gets really interesting is if I can save and invest regularly. If I could put £100 a month into income shares, I’d receive a regular stream of payments from any company that pays a dividend.
Even better, I can reinvest those dividends to build my wealth even more and take advantage of compound interest. This is how people have used investing to get to £1m in a Stocks and Shares ISA.
Two reasons to start
Starting with £100 right now, income shares would be an obvious place to put my money for two reasons.
For one, the UK has some of the highest-paying income shares worldwide. UK shares are cheap right now. One estimate puts them at a 30% discount to US stocks when comparing profits. Buying UK stocks that are undervalued could push up my income streams even higher.
Secondly, the current level of inflation is rapidly making the cash that I hold lose value. By investing in income shares, I can receive payments that offset the value I’m losing. Also, stocks provide a hedge against inflation as their revenues and profits could rise as inflation rises.
I’d plan for my holdings to keep my income flowing in the short term. And with inflation expected to be down to 2% by late-2024, I’ll hopefully come out the other side with a growing net worth and passive income.
Potential risks
Importantly, this strategy is not risk-free. Companies can cut dividends, lose value or even go bankrupt.
That means research is key to finding quality income shares that can offer me safe and reliable payouts over time.
But whether it’s my first £100 or I’ve been receiving passive income for a decade, I’m confident that high-quality income shares are a fantastic way to build wealth.
