Passive income ideas range from buy-to-let property to setting up an online business. Some appeal to me but require a lot of time or effort so don’t really seem passive. That is why I prefer passive income ideas which require as little of my time as possible.
By putting a little money aside regularly into a Stocks and Shares ISA, I am able to build up a nest egg that generates passive income. With £10 a day, I can accumulate over £3,600 a year which I could invest.
Why I like blue chip shares for passive income
There is an intuitive allure to get rich quick schemes, but a lot of passive income ideas leave me cold. Either they seem far-fetched to me, or I don’t think they are really passive.
That’s why I prefer to invest in blue chip companies such as Unilever or Diageo. With business expertise and armies of talented professionals, they are in a position to generate surplus cash. If that gets paid out as a dividend, then as an investor I can gain passive income from the companies’ efforts without scrabbling round trying to earn it myself.
Unilever, for example, is the powerhouse behind familiar brands such as Dove and PG Tips. Diageo owns brands such as Guinness and Johnnie Walker. Sure, I could set up my own online business to try to generate passive income. But I would happily let these established companies take the strain instead. £10 a day on Diageo shares would be a more rewarding use of my money than £10 a day on the company’s whisky!
A good brand portfolio and experienced management can help a company to prosper, but things don’t always go according to plan. For example, reduced demand for cleaning products after the pandemic could cut Unilever’s revenue. Similarly, if healthy lifestyles lead to people drinking less beer, that could mean a revenue hit for Diageo. A well-rounded company will already have some diversification itself, but spreading one’s portfolio over a number of companies helps with this too.
How much income and when
Some passive income ideas are speculative, so it’s unclear when income will come in – if it ever does.
By contrast, many companies pay out dividends on a set schedule, annually, biannually, or quarterly are the most common frequencies. A dividend typically reflects the company’s recent business performance, so they are not guaranteed. For example, a company may decide to stop dividends due to a change in business prospects. Again, though, a diversified portfolio should help here.
When looking at shares, a big consideration for me is how much income they offer. For example, while I like Diageo as a company, its current yield of 2.4% pales next to Imperial Brands, which yields 10%. With passive income as my objective I would look to maximize income by hunting for higher yielding shares.
But if I am looking for a future passive income stream, I would also think about a company’s future prospects. For example, Imperial has a lot of debt. Its core product of cigarettes is in decline in many markets. Will it therefore be able to maintain its current dividend level? The answer is always that nobody knows for sure. But in hunting for passive income ideas, I try to focus on shares whose free cash flows look set to cover their dividends.
christopherruane owns shares of Imperial Brands and Unilever. The Motley Fool UK has recommended Diageo, 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.