If one has to work for money, it isn’t really passive income. That is why a lot of schemes for a so-called side hustle don’t appeal to me. When it comes to passive income, I find it easiest to tuck a bit of money away regularly and simply buy shares that pay dividends. That way, I can set up a long-term income stream without needing to work for it in the future.
I apply passive income principles to searching for shares with dividends. Here are two I’ve found.
Passive income should be passive
The whole point about passive income is that it shouldn’t involve lots of work. If one is seeking to earn money from shares, it’s still important to bear that principle in mind.
That is why I eschew shares where I need to spend a lot of time understanding the business model. I also don’t like working hard to guess how it might perform in the future. Instead, I opt for straightforward businesses. I like companies with a business model I can clearly and easily understand from my own experience. So, for example, while some hydrogen cell makers could sound like exciting investment opportunities to others, I know nothing about hydrogen cells. I don’t want to spend hours or days doing the gruntwork of investigating the industry. That’s not passive!
By contrast, I understand clearly the insurance business. I also feel it is easy to anticipate how such a business will do in the future. So when looking for shares with dividends for passive income, I like Legal & General. Its yield of over 6% will help me earn money without lifting a finger.
Income from reliable dividends
When hunting around for passive income ideas, I also focus on the income part of the equation. If a company isn’t a reliable payer of dividends, where will the income come from? Capital gains are welcome, but they are different to income.
A lot of companies suspended or even cancelled dividends last year, including major ones. That underlined to me the benefit of investing in the sort of company that pays dividends through thick and thin. No one knows what the future holds, so to assess a company’s likelihood of paying dividends consistently, I first check out its historical record. Then I’ll look at cash flow forecasts to see whether it is likely able to sustain its dividend. That is one reason I like the company DCC. It has not only paid out a dividend consistently for decades, but has raised it every year for 26 years.
DCC’s highly cash generative business, including energy suppliers and other proven earners, makes me more confident that it can continue its highly agreeable dividend streak.
There are other shares with dividends I would also pick for passive income. The point is that rather than simply plunging into popular shares with eye-popping recent returns, I take an information-led approach. By going for businesses I understand, I minimise my time spent hunting. Focussing on consistent dividend-payers allows me to prioritise income. By learning just a little, I can earn income that is genuinely passive!
christopherruane owns shares of Legal & General Group. The Motley Fool UK has no position in any of the shares mentioned. 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.