Passive income can sound like a great idea – receiving money without having to work hard for it. While that may sound too good to be true, it’s a reality for millions of people. Landlords, share owners, musical copyright owners are all used to receiving regular payments without the grind of work each time.
There are lots of passive income ideas. But some involve setting up new, unproven businesses, or learning a new skill set. I don’t think that’s really passive – it sounds like a lot of work! I prefer to focus on passive income ideas I can use without learning new skills like “dropshipping” or programming.
I’d invest regularly
I’d earn income by investing money in a Stocks and Shares ISA and using it to buy shares. That could be with a lump sum. But if I didn’t have any money to start, I’d simply start putting aside a few pounds a week to get going. Passive income ideas can still generate income, even without a lot of capital.
Then I would start looking at shares I could buy in my Stocks and Shares ISA. To make this as passive as possible, I’d focus on companies I already knew and had an opinion about. For example, most people will need to do some research to understand the details of an industrial company like Victrex or ITM Power. But I already know companies like Greggs, Domino’s Pizza, Tesco, and Trainline from my own experience as a customer.
So to keep things passive, I’d focus on my own area of knowledge. One thing to note, though, is that a good business doesn’t automatically translate into a winning investment. A company could be saddled with debts, or maybe it’s so popular that investors have driven the share price up high. For example, I think the Trainline business is easy to understand. But I wouldn’t invest in it because I think it’s overvalued. Its market capitalization (the total value of all shares) is over £2bn, but train demand is currently low and may take years to recover. The company has a leading brand and many investors obviously see it as poised for recovery. But I think I can discover more reliable value elsewhere. So while I’d pick names I was familiar with, I’d still do some research upfront to see how financially attractive a share might be.
Passive income ideas need to pay income
I’d then sort through my shortlisted companies to see which paid out money to shareholders. Many companies keep money in their business to help it grow, instead of paying it out to shareholders. That’s what a company in its growth phase like Trainline does. That doesn’t mean it’s a bad investment, but for passive income, I’d seek out shares that pay excess cash to shareholders as dividends.
For example, Domino’s currently yields 2% and Tesco 3.7%. That means that for every £1,000 I put into Tesco I could expect around £37 a year in passive income. Of course, dividends aren’t fixed and can be cut or scrapped altogether. So I’d try to diversify my portfolio. But over time, by focussing on companies I already know and like, I’d expect these passive income ideas to start generating an agreeable passive income stream.