I’ve spent most of the last week on holiday on a beach in Cornwall. And there’s nothing like a vacation to get me thinking about passive income.
Like most people, I work for most of the year to earn enough so that I can spend a couple of weeks doing nothing. But what if I could keep the money coming in while relaxing?
Being a business ‘owner’
Realistically, nobody is going to just hand me money without getting something in return. So earning passive income means getting paid while someone else works.
In my case, the most obvious way to do this is by owning part of a business that can keep going without me. And the stock market gives me this opportunity.
By buying shares in a company, I become a part-owner of a business. And I can collect income when the firm distributes its profits to shareholders in the form of dividends.
Not all companies pay dividends to investors (and that’s not always a bad thing). But owning shares in the some that do is my best way to make money while I sleep.
Low costs, big dividends
One of the businesses I own shares in is Games Workshop (LSE:GAW). The FTSE 100 firm is the business behind the Warhammer franchise and it’s my number one passive income investment.
One of the reasons it stands out to me is its relatively light manufacturing base. It has a headquarters, three factories, and two warehouses – all located around Nottingham.
All of this has a value of around £65m, but the firm made £212m in operating profit last year. That means there’s plenty of cash leftover after taking care of the essential maintenance.
It’s why Games Workshop can distribute around two-thirds of the cash it generates to its shareholders. This is an unusually high ratio, which is great for investors looking for extra income.
Risks and rewards
With any business, investors need to be aware of what might cause profits to come in lower in any particular year. And this is especially true of one that distributes most of the cash it generates.
Games Workshop’s intellectual property means it’s straightforwardly illegal for anyone to copy its products. So there isn’t really a big risk on the supply side, in terms of competition.
The bigger danger is a potential recession. Nobody needs Warhammer figurines, so there’s a chance sales might slow if push comes to shove with household budgets in an economic downturn.
That’s worth paying attention to. But Games Workshop’s ability to grow sales 424% in the last 10 years while returning cash to shareholders has made it a terrific investment.
My top pick
Games Workshop is the largest investment in my Stocks and Shares ISA. And that means I have to be a bit careful when it comes to thinking about building a diversified portfolio.
I am, however, expecting the shares I own to be a terrific source of long-term passive income. But for anyone who doesn’t own the stock, I think it’s definitely worth considering.
