There’s a lot of different information for new investors concerning passive income. But is earning significant money while you sleep – literally doing nothing – actually a realistic ambition?
I think it is, but there are some important rules to follow. And the biggest one is to have realistic expectations about what can be achieved and how.
Dividend growth
The stock market’s a great place for passive income investors. When things go well, the amount of cash that businesses return their earnings to shareholders as dividends goes up.
That means investors can find that they don’t just get money for doing nothing. They can be in a position where their income stream actually increases while they just sit and watch.
This doesn’t happen with owning bonds. Returns from bonds are generally more stable and less likely to fall, but it’s also guaranteed that they won’t go up in the future.
The trouble is, inflation means this is almost certain to involve going backwards in real terms. But while dividends aren’t guaranteed, shares give investors a chance at moving forwards.
High yields
Fluctuating share prices mean that not all stocks come with the same dividend yield. Taylor Wimpey shares currently have a 9% yield, while National Grid stock yields just 4%.
On the face of it, that means an investment in Taylor Wimpey should generate twice as much passive income as an investment in National Grid. But things aren’t so simple.
Taylor Wimpey’s dividend looks much riskier. The firm’s currently paying out more to investors than it’s making in net income and this isn’t going to be sustainable indefinitely.
By contrast, National Grid’s about to enter into a more favourable regulatory environment where its profits should go up. So the lower dividend looks less risky in the near future.
A balancing act
As with so many things, the key with dividend shares is to find a balance. Some sort of risk is inevitable, but investors need to make sure the potential returns are high enough to be worth it.
Primary Health Properties (LSE:PHP) is a company that makes money by leasing GP surgeries. Its largest tenant is the NHS, which means high occupancy levels and low risk of unpaid rent.
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On top of this, the firm just merged with its main competitor, significantly reducing competition in the industry. That should give it long-term power when it comes to renegotiating leases.
There’s a 7% dividend yield on offer right now, which is pretty high. And I think it’s a good stock to consider for investors setting out on a passive income journey.
Taking things slowly
The big risk with Primary Health Properties is the possibility of a change in government policy affecting demand for GP surgeries. That’s something to take seriously.
The firm’s average lease though, doesn’t expire for another 10 years. So investors who buy today have a decent chance of getting their money back in dividends before any change can take effect.
There’s more to earning passive income in the stock market than just comparing dividend yields. But there could be real rewards on offer for investors who are willing to look for opportunities.
