Passive income ideas come in all shapes and sizes. One I use myself, along with millions of other people, is buying shares I hope will pay me dividends in future.
As an approach, I reckon this has both pros and cons. Here are eight.
Pro: it’s genuinely passive
What I see as a massive pro is that as a passive income idea it really is passive.
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I bought shares in BP — and now earn regular dividends from the oil major without ever lifting a finger.
I think that compares favourably to supposedly passive ideas that can actually involve a lot of work, like setting up an online shop.
Con: it takes capital…
Buying shares requires money, even though the amount can be little.
That can be seen as a con compared to some passive income ideas that require no capital. But I think the catch there, for me at least, is that an idea that requires zero financial capital is likely to require some human capital such as labour and/or time.
Pro: …it doesn’t take much capital
When I said above the amount can be little I meant it!
If you have enough to buy a coffee each day, you already have enough to start building up in a share-dealing account or Stocks and Shares ISA to earn passive income.
Pro and con: the income’s not guaranteed
Dividends are never guaranteed, even if a company has paid them before.
That can be a con, as when Shell shareholders in 2020 saw the dividend cut for the first time since the Second World War.
But it can also be a pro.
Why? Well, a company that has not paid dividends before can suddenly start (like Google parent Alphabet did last year), a business can announce a special dividend on top of the ordinary payout (as Dunelm has done on multiple occasions) and a firm can raise its dividend per share (as Guinness brewer Diageo (LSE: DGE) has done every year for decades).
Con: it can take effort to find great shares
What sort of share could be a good choice for future passive income streams?
It can take some effort to find out. After all, a company can axe its juicy dividend suddenly (as Direct Line did a couple of years ago).
But taking time to dig into a share can also reveal a potential bargain that looks set to generate a lot of future income.
I bought Diageo shares because I know the alcoholic drinks market is huge and the firm’s brands, such as Johnnie Walker, give it pricing power that can translate into chunky free cash flows and dividends.
Pro and con: share prices matter too, not just dividends
Still, while I am upbeat about the demand outlook, there is a risk that fewer drinkers in younger generations will mean Diageo’s sales shrink.
That helps explain why the FTSE 100 firm’s share price has fallen 26% in five years.
I pounced on that as a buying opportunity as I felt it was a bargain.
But it points to the fact that, when buying shares for dividends, it is important to remember that they can later lose value.
On the other hand, an increasing share price could ultimately mean (if sold) extra passive income on top of any dividends.
