Unearned passive income can be a great thing. And taking a few actions to keep a passive income stream flowing to me is worth the effort.
My preferred route to passive income
For me, the best way to achieve passive income is to invest in dividend-paying stocks. And an investment of £25 per week is a decent amount of money to begin with. After all, it adds up to just over £100 a month.
And investing monthly is my preferred option, because my earned income arrives once per month as well. So it’s a simple step to set up a monthly automatic investment from my current account and into my share account.
However, rather than investing into a basic share account, I’m keen to take advantage of the tax advantages offered by a Stocks and Shares ISA. After all, not all ISAs are linked to existing underlying stock investments. Many ISA providers offer Stocks and Shares ISA that are empty and ready for me to fill with my own stock choices.
But it’s worth me shopping around for an ISA because different providers have different fees. But that’s a small amount of work to do, considering the advantages that potentially arise from building a passive income from dividend stocks.
Many ISA providers will offer a low-cost regular investment service. So it will often be possible to build up a position in several stocks with my monthly payments into the ISA. And, in that way, I can make sure my money’s invested between several stocks. But another useful way to achieve wide diversification is by investing in share funds and investment trusts.
Choosing dividend-paying stocks with care
Of course, not all dividend-paying shares and funds are worth an investment. I’ll need to choose carefully. But I’m keen on several stocks operating in sectors such as utilities, energy, fast-moving consumer goods, IT and others.
Generally, I like to try to avoid the more-cyclical sectors and target businesses that can weather an economic downturn because they enjoy stable demand from their customers.
And several companies are high on my watch list. For example, I like the look of energy network company National Grid, pharmaceutical giant GlaxoSmithKline and fast-moving consumer goods specialist Unilever.
But I’d also consider regular investments into managed share funds. And I’d choose tracker funds such as those following America’s S&P 500 index and London’s FTSE 100, FTSE 250 and small-cap indices.
Nothing’s certain in the world of shares because they can move up and down according to the fortunes of underlying businesses. But I’d aim to reinvest my dividends back into my stocks and funds with the aim of helping my investments to compound in value over time.
Then, when I’m ready to take a passive income — perhaps in retirement — I’d switch to drawing my dividend cash from the Stocks and Shares ISA account.