Owning businesses that are able to take care of themselves is a great way of earning passive income. That way, without having to do anything, I can receive extra cash to boost my monthly salary.
The stock market has some great companies that investors can buy shares in. And many of those pay out their earnings as dividends to their owners.
Buying shares
The FTSE 100 and the FTSE 250 have a number of great companies to own, such as drinks business Diageo (LSE:DGE). The firm’s spirits portfolio includes a number of category-leading names.
One of these is Johnnie Walker. And last year, sales of the world’s most popular whisky reached 22.7m cases, an 18% increase on the 19.2m sold in 2021.
I personally didn’t do anything to generate that growth. But as a shareholder, I benefit directly from those sales – a percentage of the profits from those sales is attributable to me.
By owning Diageo shares, I make money every time someone buys a Guinness, a Smirnoff, or a Tanqueray. For me, joining in with the company’s success is much easier than setting up by myself.
Dividends
Of course, some of the company’s profits are reinvested back into the business. Diageo, for example, relies on the strength of its brands, so it has an ongoing need to spend on marketing.
The rest, though, can be used for a number of purposes, including being paid out to shareholders as dividends. And this provides investors like me with a source of passive income.
Investing can be risky and virtually every business has good years and bad years. In the case of Diageo, sometimes higher inventory levels can cause sales and profits to come in lower in any given year.
Over the long term, though, the best companies generate enough cash to provide great returns for shareholders. Investors who are prepared to have a long-term focus tend to do well in the end.
Strategy
My strategy when I’m looking for stocks to buy is to focus on high-quality companies. I think these are the easiest to own when times are tough and provide the best returns over the long term.
I’m also a believer in regular investing. Predicting short-term movements in the stock market is extremely difficult, so the best chance of taking advantage of low prices comes from buying often.
A good way of doing this is by putting money aside, whether that’s £3 daily or £20 weekly. If I can do this, I’d have around £45 every fortnight, which I could invest into businesses I’d like to own.
From there, it’s just a question of leaving the investment and waiting for the dividends to come in. I can get to work saving for the next investment and think about what stock I’m going to buy next.
