There are all sorts of passive income opportunities, from setting up an Etsy shop to investing in property. But not all passive income opportunities are created equal. How I explain my approach to assessing and ranking passive income opportunities.
Looking at income potential
Different passive income ideas dangle anything from a few extra pennies a month to life-transforming riches.
But it is worth looking at the actual income potential in detail. Just because someone else has got an idea to work doesn’t mean that anyone can. So while I admire people who can set up successful online stores selling clothes, for example, I don’t think I would make a good income on it myself. Instead I would rather invest in a company like Associated British Foods, which owns Primark. They have the experience and know how to profit from clothes retail. By buying shares and receiving any future dividends, I would be able to gain income from that without having to sell the clothes myself.
I also look at the question of when I might receive income. Many shares pay out income quarterly. If I buy shares in British American Tobacco today, for example, I would expect to start receiving income in May, with a dividend due on 12 May. After that I would expect a dividend each quarter. By contrast, if I set up new passive income opportunities like online shops, I may need to pay out capital now to get it going I may then have no idea of when to expect any income – if ever.
Passive income opportunities ranked by time investment
There’s no such thing as a free lunch, goes the saying.
I think the same is true of passive income ideas. To start with, one usually needs to be willing to invest time or money. So it’s possible to use passive income ideas which don’t require money – but often they will take a lot of time.
But that’s not really passive. The whole point of passive income is that the money comes in without having to work long hours for it. If the passive income is a side hustle eating into my spare time and weekends, I wouldn’t say it’s really passive.
That’s another reason that shares are one of my passive income opportunities. By investing in a diversified portfolio of large, reputable companies, I don’t need to spend a lot of time monitoring my investments. In fact, I would feel comfortable going months or even years at a time without checking how they are doing, just enjoying the income rolling in.
While I might be able to get higher returns actively trading faster growing companies, I am happy to have a genuinely passive income. British American Tobacco, for example, yields 8%. While tobacco usage may decline in many markets, I don’t feel the need to monitor my investment in BAT closely. But that’s partly because I make sure to diversify my holdings so I am not too reliant on one stock for income. That way, even if a company suspends or cuts its dividend, I can still receive passive income.
