The appeal of passive income is easy to understand. Rather than working hard for every pound, sitting back and letting money come in without effort sounds alluring. While passive income is appealing, a lot of passive income ideas don’t make my list. I keep things simple by making sure my passive income list follows these rules.
A list needs more than one thing on it
A single idea doesn’t make a list. So, for example, although I look to make passive income from shares, I always make sure that I have multiple shares on my list.
It can be tempting to look at a share like Imperial Brands, whose yield has touched 10% this week, or Vodafone with a 6% yield, and imagine the income from concentrating in one such share. But investing in only one company is a risky strategy, no matter how good the company seems. Market demand can change, or a company can have bad luck. Both Imperial and Vodafone have cut their dividends in recent years, for example, and could do so again in the future.
What’s interesting is that some of the possible negative factors they face – such as declining tobacco use or the cost of mobile licenses – are industry wide. That’s why I don’t just diversify my passive income list across different companies, but also between industries. No matter how high yielding an industry may be, it is risky to put too much of one’s assets into it.
The sleep easy passive income list
Another thing about my passive income list is that I want it to be genuinely passive. I want to invest some money, sit back, and receive dividends regularly.
That means that I don’t invest in companies that require a lot of monitoring.
Instead, I prefer companies in established industries with fairly predictable results. Consider for example, McBride and Unilever. While the detergent maker McBride looked cheap to me a few months ago, its small size and limited pricing power mean it has struggled to grow profits in recent years. A new chief executive unveiled a focused strategy, which could change the results. For a growth pick, that might be attractive. But for a regular source of passive income which I don’t need to spend time thinking about, it seems like too much monitoring the company news for my liking. So it doesn’t make my passive income list.
By contrast, consumer goods behemoth Unilever has been growing its dividend for years and paid out all the way through the pandemic. That doesn’t mean Unilever is worry–free: a sustained fall in demand for its products could affect dividends, as for any company.
While it is adding new business areas whose long-term results are as yet unproven, the bulk of its revenues are derived from well-established business franchises such as Dove and Ben and Jerry’s. So I feel comfortable putting some money into Unilever and expecting passive income from it, without having to worry about its short-term business results impacting payouts.
christopherruane owns shares of Imperial Brands 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.