Passive income ironically takes work to achieve. It requires investment now so that it can grow and bloom and provide simple rewards further down the line. But I don’t have to have a big starting sum to get going. I’m happy to start with just £200 a month, which I’ll invest in the stock market so it can grow. Then I can be paid dividends by blue-chip companies.
Investing for a stream of growing passive income
With the objective in mind of creating a passive income from shares, I’d go about achieving this by focusing on buying quality companies. To create this, I think it’s best to look for companies that can continuously and reliably post sales growth, that have high returns on capital employed (known as ROCE), and that have strong margins.
This tends to lead me towards blue-chip and often consumer goods companies such as Diageo, Unilever and Reckitt Benckiser. The former may have had some of its shine taken off by the pandemic. But most years, and in most economic cycles, it and the others perform well for investors. Especially those taking a long-term view of things.
That makes them ideal for those looking to build a passive income from investing in the stock market.
Investing for dividend yield and capital growth
It’s worth remembering the dividend yield isn’t everything. Often if the yield is very high it means other investors are worried. It also puts the dividend at greater risk of being cut. Furthermore, if a company prioritises the dividend, it might not be investing for growth back into the business.
I feel that the large fast-moving consumer goods companies can provide a growing dividend that’s also sustainable, alongside share price growth. This combination for me is the ideal way to approach creating a passive income from investing £200 per month.
But if dividend yield is more of a consideration, then AJ Bell has rounded up some of the FTSE 100 shares that should be among the biggest dividend payers this year. M&G, Imperial Brands, Polymetal, British American Tobacco and Evraz are the highest-yielding FTSE 100 shares.
Looking back at my plan, it’s all about three core components: patience, consistency and choosing the right high-quality, established stocks. By focusing on dividend-paying shares with the potential for steady share price growth, I think any investor can create a passive income that could snowball in value. The more patient and more consistent, the bigger the snowball.
The key is to remember that compounding will do a lot of the work for us if we stay invested, stay focused on the goal and allow time to do a lot of the work for us. Then we can sit back and watch the income pour in.