Passive income is as simple as it sounds. It’s real money one receives without working. Think that sounds too good to be true? Consider agricultural landowners, music royalty owners, shareholders, and more. These are all people who can sit at their holiday home getting money wired to them regularly without needing to lift a finger for it.
It’s easier to generate passive income with some sort of capital. But a lot of people don’t have any spare capital. Here’s how I would start earning passive income even without capital, by putting aside just a pound a day.
Play it safe for passive income
With just a small amount of money at first, it can be tempting to go after exotic investments that seem to offer high rewards. I take the opposite approach! Limited funds make it even more crucial to not lose money by investing in companies whose attractiveness the stock market seems to be questioning.
So I wouldn’t focus on the high possible returns of beaten down companies, such as Cineworld or Aston Martin. Instead, I would investigate companies that meet a number of criteria. I’d hunt for large companies with positive cash flow over many years. The reason I’d look at cash flow is because this is the hard cash actually coming into the company. Companies often talk about earnings but that is an accounting measure. Cash flow is what enables a company to survive, and pay dividends.
This would narrow the investment options down a lot. But to get passive income, I’d want a share which was a regular high dividend player. That would help me build my passive income stream almost immediately. It’s easy to find a list of high dividend paying shares and typically it contains names such as Vodafone, Imperial Tobacco, and M&G.
Focus on the future
But to grow passive income saving just a pound a day, it’s important to look at the future, not just the past. Sometimes, a high yielding share indicates the City is pricing in an expected dividend cut. Imperial Brands cut its dividend this year, for example, although it still offers a juicy yield.
So I would look at the names I had discovered and try to decide which I thought also had strong future prospects. For example, Vodafone could benefit from a boom in homeworking – but the mobile phone industry is also notorious for its high capital costs. While I like Imperial Tobacco and hold it myself, some people might worry that a long-term decline in smoking could hit profits.
So I’d be tempted to zoom in on shares where I thought there was also a future growth story for customer demand even if it is a small one. I’d say that’s true of financial services provider M&G. I also think it’s true of general insurer Legal & General. Another company I’d put in the same category is financial provider Standard Life Aberdeen.
I’d start paying at least a pound each day into savings in a Stock and Shares ISA. Over time, I’d learn more and begin to pick shares. Then I’d sit back to watch the passive income from these high-quality companies roll in.
