The idea of passive income is attractively simple. Rather than having to work for every pound, at least some income comes in ‘passively’ – for little or no work. From rent on a let property to a royalty payment for creative work, there are lots of practical examples of passive income. But I find a lot of passive income ideas also quite wacky. Setting up new business doesn’t sound passive to me at all! That’s why I prefer to put some money in a Stocks and Shares ISA and choose shares as passive income ideas.
Why I like shares as passive income ideas
I think one thing a lot of people overlook about passive income is that it’s meant to be passive.
For example, I’ve noticed a lot of people are starting to eat meat alternatives. I could set up my own business selling alternative meat online to try and monetize this trend. But why go to all that work? A company like Unilever has vast food experience and marketing expertise. They already have distribution and sales networks. With their ‘Future Foods’ initiative, they are aiming to sell a billion euros a year’s worth of plant-based meat and dairy alternatives.
Simply by buying Unilever shares, I hope to benefit from their success, without having to do any work for it myself. Plus the company has a range of well-known cleaning and beauty brands, so it’s not just a speculation on the growth in meat alternatives. With a yield close to 4%, Unilever is among the income investing ideas that let me sit back and get passive income every quarter.
I’m not guaranteed such income, though. It’s not yet known whether Unilever’s push into areas like meat alternatives will be as rewarding as its wider portfolio. Some analysts also worry that the cleaning product sales boom engendered by the pandemic will tail off and hurt profits. That’s why, as with any share, I diversify so that my Stocks and Shares ISA isn’t overly reliant on one company.
How I choose shares
Lots of shares may seem like attractive passive income shares at first glance. So how do I decide which ones to buy?
First it’s helpful to distinguish between growth and income shares. Growth names like S4 Capital are expected by many investors to grow. They tend to be early-stage companies with a lot of market space still left open to them. They can be attractive – but not as passive income ideas. For passive income, I would focus on income shares. Often in more mature markets, these companies generate money and pay some of it out to shareholders as dividends.
A highly cash generative business like tobacco can equate to a strong income stream. Tobacco company Imperial Brands is paying out 10% right now, for example. But tobacco faces an uncertain future. So while I do hold Imperial, I’d also limit my exposure to it. Looking at the likely future demand for a company’s products and indeed a whole industry is one way I assess a share’s attractiveness on my passive income list. Instead of just looking at historical dividend data, I dig in to available information and try to understand whether the company is likely to continue paying dividends in future.
christopherruane owns shares of Imperial Brands, S4 Capital plc, and Unilever. The Motley Fool UK has recommended Imperial Brands and Unilever. 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.