One of the easiest ways I can think of to earn passive income is to put some money into the stock market, sit back, relax, and hopefully let the dividend payments (and good times) roll.
With a spare £20,000 now, I reckon I could set up lifelong passive income streams. £20k is a fair bit of money, admittedly. But that is the annual allowance for my Stocks and Shares ISA. Making a one-off investment in an ISA that should keep paying me money each year for decades (without even touching the capital) seems like a smart idea to me.
Lifelong outlook
I am a long-term investor. Still, even allowing for that, thinking in terms of a lifetime can be hard to do.
Cast your mind back just 10 years, for example. So much has changed since then. Go back 20 or 30 years and that is even truer.
Dividends are basically spare money a company can distribute to shareholders, thanks to the success of its business. But how can we know what businesses might be successful decades from now?
Will Tesla be the world’s biggest carmaker, or just an also-ran? Will Shell be raking in profits, or suffering from a demand drop when it comes to fuel?
The questions are endless.
Some companies have a long track record. But the past is not necessarily a guide to the future. Shell had not cut its dividend since the war – but it slashed it in 2020.
Amid such uncertainty, with passive income for life as my goal, I would follow a few key principles.
Always, always diversify
One is that I would spread my money. Rather than agonise over what will happen to a currently brilliant company in future (the truth is, nobody knows for sure), I would diversify across a range of industries and companies. That £20,000 would let me comfortably invest equally in five to 10 companies.
Next, I would work out some big investment themes of industries I expect will see strong, resilient customer demand for the rest of my life.
Will people need to visit a supermarket in future? I do not know. But will they need to eat? Yes. Will demand for water filters grow or decline? I do not know. But will there still need to be a mass water distribution network? Yes.
By identifying such themes – some of which might not be significant in today’s world, incidentally – I could spot some hunting grounds.
Within those hunting grounds, I would look for companies with a sustainable competitive advantage that could give them pricing power.
Eyes on the prize
But just having a strong business does not mean a company will pay me passive income in the form of dividends. Google parent Alphabet is enormously profitable – but does not pay dividends, at least not yet.
When investing my £20k, I would therefore also consider how likely a business seems to be to pay dividends.
For example, I would look at its current dividend strategy, which is sometimes laid out in a firm’s annual report. Other things like cash flows and net debt could also help determine the likelihood of future shareholder payouts.
Putting £20k to work today could help me earn passive income – and hopefully a growing one at that – for the rest of my life.
