Forget side hustles or buy-to-let property (both of which actually require a lot of puff and bother), I reckon the stock market is one of the few places for generating true passive income.
It’s not hard to get started either.
Step 1: Save…anything
Naturally, it’s necessary to have some money to invest in the first place. However, I’d wager that this is a lot less than most people think.
Setting aside £25 a week is a great start but, frankly, anything is better than nothing. I go as far as to say that the first step to earning a solid passive income from the stock market is achieved in the brain. It’s about accepting that the process is a marathon rather than a sprint.
What’s more, there are little ways of making this money go further. For example, taking advantage of a broker’s regular investing service drives down commission costs. Some platforms don’t charge anything at all!
Step 2: Seek out resilient dividend stocks
Having saved a small amount, it’s time to start buying.
But wait! I wouldn’t just snap up the first company that springs to mind.
Some appear to be offering monster dividend yields when, in reality, all that’s happened is that their share price has fallen (a company’s valuation and dividend yield are negatively correlated). This suggests the business is going through a ‘sticky patch’ or worse.
Guess what’s usually the first thing to be cut in such a situation?
This is why I generally look for companies that provide a service or products where demand tends to be fairly resilient.
For example, we all need food and drink and access to electricity. We also get sick occasionally. So, owning shares in firms like Tesco, National Grid, and GSK would make sense to me.
Nevertheless, no dividend stream can be guaranteed. For evidence of this, even some of the most ‘reliable’ stocks slashed their payouts during the early days of the pandemic.
However, having relatively stable earnings usually makes it quicker to recover from setbacks.
Of course, stock picking isn’t for everyone. So, an alternative for newbies is to buy an exchange-traded fund that tracks the FTSE 100 index. This means I’d own a minuscule part of each of the UK’s 100 biggest companies.
Spreading my money around in this way ensures I don’t need to worry when individual companies share prices yo-yo about. This safety-in-numbers approach also makes the dividends I receive from the fund even safer.
Step 3: Consistency is key
Once purchased via a broker (ideally in a tax-efficient Stocks and Shares ISA), the only thing left to do is sit back and wait for the passive income to arrive.
Most companies that pay dividends tend to divvy out the cash twice every year. However, some pay every three months.
Initially, we’re probably talking pennies rather than pounds. That’s fine – I can keep adding to my stocks when money becomes available. The more shares I own, the more in dividends I should receive. I can help things along by reinvesting whatever is received back into the market.
So, while generating hundreds of pounds a month in passive income from the stock market might seem impossible to begin with, it’s anything but.
Just add commitment and time.
