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How to make passive income with shares in 2021

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For many of us, the New Year can offer a fresh start. At the moment, most of us may feel like we need this more than we usually do, given the problems of 2020. Gaining an extra source of income can be of major benefit to most of us. Luckily, we don’t need to start a business or write a book to do so. Investing in shares can be the way forward. Here’s how I’d aim to make passive income in 2021 if I was only starting to invest now.

Passive income through shares

Though the term passive income is a fairly new addition to the national lexicon, for those of us who invest in shares, it’s something that has been talked about for many years. In the stock market, passive income comes in the form of dividends.

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For those who don’t know, a dividend is simply a portion of profits a company pays out to its shareholders. Not all companies pay dividends, and those that do offer different amounts. Unlike many investments, these dividends are not paid on a percentage basis, but on a pence-per-share basis.

It mean the percentage return is dependent on both the actual payout, and the share price at the time of purchase. This makes it possible to lock-in very high returns. With coronavirus concerns looking set to dominate the markets for a little longer, share prices could stay cheap, allowing anyone starting on their investing journey now to lock-in attractive passive income returns not only for 2021, but for years ahead.

Low prices and high yields

The prices of shares go up as well as down. This is how capital gains are made (or lost), and for most is the main consideration when investing. However, as I said earlier, a low share price offers more than this.

Often a stock fluctuates based on short-term news, or even technical indicators. Expectations drive the price, as do fear and greed. Luckily none of these things are necessarily correct, or reflective of a company’s true strengths and weaknesses.

When considering how to make passive income in 2021 then, we need to be on the lookout for companies whose share prices are unfairly low, but are continuing to pay out dividends.

For those not used to the stock market, this can be a daunting prospect. When investing for income alone, I always suggest sticking with larger, blue-chip firms. In the UK this means looking at the FTSE 100. Finding the current yields of FTSE 100 components is easy enough.

Choosing the right company is more difficult however. One needs to look at the fundamentals of each firm and the market it’s in. Good advice is essential here.

To maximise a yield, we should also consider if the company’s share price is currently too high or low. A fundamentally strong firm will still see its share price go up and down. Perhaps counter to what we may think, we want to buy those shares when everyone else is selling. This means a low price and a good yield.

Becoming a top stock picker won’t be an overnight undertaking for those unfamiliar with the stock market. But for many, the key to making a start on a passive income journey in 2021 is to do some research and then buy dividend shares. That’s what I’d do!

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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