Passive income is money one receives without having to work for it. One common source of passive income is investing in shares that pay dividends. As dividends are never guaranteed, I like to use multiple passive income ideas at once.
Here are five such passive income ideas I would consider at the moment.
Well known brands
I would consider investing in Direct Line. The financial services group is well known thanks to its iconic red telephone. That helps it to attract and retain customers.
Insurers can make attractive passive income sources because they take in a large pool of money as premiums but when things go well, need to pay less of it out as claims. That can make for a cash generative business model, which helps to support dividends.
With Direct Line currently yielding 12.5% including special dividends, it certainly seems attractive. In reality the prospective yield is likely lower, as last year the company compensated for dividends not paid during the pandemic. Nonetheless, the pre-pandemic dividend of 29.3p still equates to a 10% yield at today’s Direct Line share price. Risks include recent government moves to tighten rules on pricing of policy renewals, which could hurt profits at all insurers.
Another well known brand on my list of passive income ideas is supermarket chain Morrisons. I like the company’s vertically integrated supply chain and moves into online selling. With a yield of 4% excluding special dividends, the payout is attractive to me. But risks include price competition in the UK grocery market.
Passive income ideas in finance
I’d also consider a couple of financial companies as passive income ideas.
The City of London Investment Trust yields 4.8%. It pays dividends quarterly, which can be attractive to many passive income seekers. It has grown its dividend annually in recent years, even during the pandemic. The trust offers exposure to a lot of shares, including FTSE 100 stalwarts such as Diageo, Rio Tinto, and Unilever. I am attracted by the fact that the trust does the share picking, so I could simply sit back and enjoy any income it distributes. One risk is that the dividend is fairly thinly covered, so if the companies it holds slashed their dividends, the trust may struggle to maintain its own payout level.
Another financial company on my passive income ideas list is Jupiter Fund Management. As the name suggests, Jupiter manages funds. The name is already familiar to many retail investors who buy into its funds – but I think Jupiter itself could be an attractive addition to my portfolio for its passive income stream. The company yields 6.3%. One risk is growing competition from low-cost fund providers, which could eat into profit margins.
High-yield tobacco company
The biggest holding in the City of London Investment Trust is British American Tobacco. The tobacco giant, which owns brands such as Lucky Strike, would also be one of my passive income ideas.
Tobacco companies like BAT tend to be highly cash generative. Its 7.4% yield is among the highest of any FTSE 100 company.
But BAT had over £40bn of net debt on its balance sheet at the end of last year. I see a risk that cash generation could be diverted to repay debt rather than paid out as dividends in future.
