Working for one’s money can be hard. Between long hours, demanding deadlines, and managing workplace politics it’s no surprise a lot of people aren’t missing the daily grind right now. But work is an important source of income for most people. That’s why a lot of people now are keen to set up passive income streams – ways of getting money without having to work for it.
Some of these are capital intensive, like buying a property and renting it out. But some passive income streams can be built for just a couple of pounds a day, the price of a bus ticket. Here I explain how.
Why I like shares for passive income
My own approach to passive income is that shares can be a good way for me to earn it. If I just tuck away a couple of pounds each day into a Stocks and Shares ISA, I will hardly miss it. But over time that can help me build a tax-efficient savings pot with which to invest in shares for passive income.
Not all shares generate income. Some companies are in growth mode, so prefer to reinvest their profits in the business. That is why companies like The Hut Group wouldn’t be on my passive income list. While their shares may grow, I don’t expect them to pay dividends soon. Indeed, their boss said last month that he has no plans to start paying dividends and will instead focus on building the business.
So for passive income I would look for a share I expect to pay dividends consistently in the future. Dividend policies can change, but a helpful starting place is the company’s payout history. Have they paid out dividends regularly in the past and do they look likely to have the financial means to do so in the future? Utilities are often a popular pick for this reason. Not only are they often substantial dividend payers, but a regulated pricing regime can provide forward earnings visibility which many non-utility companies don’t have. So, for example, the near-5% yield of United Utilities looks like an attractive passive income source.
Keeping it passive
One mistake many people make when seeking passive income is investing in shares and then spending hours every week monitoring them. That is a mistake in my view not because it isn’t right, but because it means the income isn’t passive. I’ve learnt that truly passive income should keep flowing in even if I go away for months or years and pay no attention.
That’s why a popular passive income pick is old blue chip companies with fairly steady markets, such as Unilever, Diageo, and Morrison’s. Their fortunes may ebb and tide but in general, long-established companies which are cash generative are the sort of passive income pick which let me sleep at night without thinking about them. If markets change, for example, because shopping habits shift or alcohol consumption falls, the companies’ fortunes could change. However, one technique I have selected to help manage such risks is diversification. As I put a little money away often, I can invest in different companies on my passive income list. That way, even if one company I’ve discovered does badly, I would still expect to be earning passive income overall.
christopherruane owns shares of Unilever. The Motley Fool UK has recommended Diageo, Morrisons, 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.
