I love the idea of generating passive income. Let’s be honest, who doesn’t like the sound of earning extra cash while they sleep?
Now, that may sound too good to be true. But it’s not. And there are plenty of easy ways to earn some extra cash on the side. Inflation has run rampant in recent years and I’m not keen on the thought of it eating away at the cash in my pocket. By generating passive income, I can try and hedge myself and protect the value of my money, as opposed to it sitting stagnant in the bank.
If I had a spare £5k, here are the steps I’d take to create streams of passive income that I could rely on in the years to come.
Selecting the best
The first thing I’d do would be to open a Stocks and Shares ISA. Every UK investor has a £20k annual contribution limit to take advantage of. With no taxes due on capital gains or dividends, using an ISA is a smart way for me to maximise my potential gains.
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Next up, I’d have to research where to put my money. For me, the FTSE 100 is the best place to start. The index homes some of the highest-performing companies in the UK. What’s more, its average dividend yield of 4% is higher than most major benchmarks across the globe.
Within the Footsie, I’d have to do my homework. By doing so, I’d minimise the risk of making poor investment decisions. For example, I’d look at a company’s financial health. A strong balance sheet would signify that a firm would be able to potentially weather any storm. Furthermore, I’d also look at debt levels, given higher interest rates could make it more expensive to pay off.
Finally, I’d also look out for Dividend Aristocrats. These companies not only consistently pay a dividend, but they also have a strong track record of increasing the size of their payout. While past performance is by no means an indication of future returns, it would provide me with a level of comfort. The FTSE 100 consists of numerous Dividend Aristocrats. This includes companies such as British American Tobacco, which I hold.
Extra steps
So, by targeting the right shares, I’d enhance my potential for some handsome returns. But there are a few other methods I could use.
A key one is playing the long game. What I mean by this is holding the shares I buy for a period of five years minimum. The stock market can be volatile. But by looking at the bigger picture, I’m able to ignore short-term peaks and troughs in favour of long-term gains.
Alongside employing this mindset, I’d also reinvest my dividends. Over time, I’d benefit from compounding, meaning I’d earn interest on my returns as well as my initial investment. This would lead to greater passive income payouts further down the line.
Of course, dividends and stock market returns are never guaranteed. Nevertheless, by adopting these methods, I’m confident I could create streams of passive income that would serve me for later life.
