I find passive income appealing because it can boost my earnings without bloating my work hours. But not all passive income ideas are equal. Some actually involve a lot of time. To me they don’t seem very passive at all.
That’s why one of my favourite passive income ideas is tucking money away regularly in a Stocks and Shares ISA and using it to buy dividend paying shares. Here is how I would do that with £20 a week.
Regular saving
£20 a week might not sound a lot – but it adds up to just over £1,000 a year. That’s enough to start getting invested in more than one UK share. That means that I could reduce my risk by diversifying across a variety of business areas and companies.
I wouldn’t start investing immediately, though. Most ISAs charge transaction fees. To reduce the proportional impact, I would wait until I had at least a few hundred pounds saved up to invest. That would only be three months or so, if I was saving £20 a week.
Using time wisely
Those few months of saving before making my first investment would be an ideal opportunity for me to do a bit more research into specific passive income ideas. That way, I would be able to form a better informed view on the possible opportunities and risks of specific investments.
For example, to generate passive income, I would consider investing in high yielding shares. But sometimes shares have a high yield for a reason. Maybe the market thinks a company’s current dividend payout is unsustainable and so factors in the possibility of a future cut.
Choosing specific passive income ideas
Although I’d do more research, some shares already appeal to me as passive income ideas.
For example, tobacco giant Imperial Brands yields 8.8%. So for every £100 I put into Imperial shares now, I would hope for annual passive income of £8.80. That is if the current dividend level stands. It could increase, as it did this year when the dividend was raised. Then again, it could also be cut as it was last year. Risks such as declining cigarette consumption in some markets are a threat to profits and thus dividends.
I would also consider investing in some passive income ideas from the finance sector. I like the look of the insurer and financial services provider Legal & General for my portfolio. Its iconic brand is a strong asset in my view. That makes it easier and cheaper to attract new business. I also like the company’s progressive dividend policy. Currently it yields 6.8%. One risk, as with any insurer, is maintaining underwriting quality. If that slips, it can hurt profits.
Building a passive income stream
After a year I could have roughly £500 invested in each of Imperial Brands and Legal & General, with prospective annual passive income of around £156. But if I kept putting away £20 a week, my investment pot would keep growing.
While I could take the dividends as passive income, I could also reinvest them. That would build my capital faster and I could put it to work on a wider range of passive income ideas.