Being paid to do nothing for the rest of my life might sound like a dream. But I reckon it’s perfectly possible via the stock market if I take the following steps.
Develop a saving habit
Before I can begin to earn passive income, I need some savings to invest. However, this doesn’t need to be much at all. The key is to start small and build from there. Here’s an example.
I love my coffee. However, a daily cup from my local caffeine hotspot costs £2.50. Over a whole 31-day month, that amounts to £77.50. Over a year, its £912.50. That’s a great amount of cash to get started on the markets. And that’s just from sacrificing a cup of coffee that tastes the same every day.
If I can achieve a 5% dividend yield on that initial £912.50, I stand to receive £46 in Year One. That’s far more than I’d get from a standard bank account.
Use the right account
Where’s the best place for this cash to go? That’s easy, in my opinion. A Stocks and Shares ISA is the closest I can get to a ‘free lunch’.
By holding my shares in this account, I pay no tax on the passive income I receive. That may amount to a few pence initially but, over time, it could become hundreds and possibly thousands of pounds every year!
Call me a scrooge, but I’d rather all that money was in my pocket rather give it to the taxman.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Buy dependable passive income stocks
Having got into the habit of regularly saving, I then need to start building a portfolio of dividend-paying shares.
What I’m looking for here are resilient stocks that have a history of returning more and more cash to their shareholders. As an example, FTSE 100 member Halma has an unbroken history of raising its payout by 5%, or more… for the last 43 years! That’s the consistency I’m after.
What I’m steering clear of are companies with sky-high dividend yields that will probably turn out to be one-offs. This means potentially ignoring what other investors are desperate to buy. If it means prioritising ‘boring’ stocks like utilities and pharmaceuticals, so be it.
Spread the risk…
Passive income can never be guaranteed. A company may go through a rough patch where profits are hit. Things may get so bad that it needs to cut its dividends to shareholders, or stop paying them completely.
This is why it’s vital for me to spread my cash around a bit. A portfolio of around 15 or so stocks should do the trick. This way I’ll still have money hitting my account, even if it’s temporarily a little less than usual.
…and then do nothing
The last step is simple but not easy. It involves doing nothing. More specifically, it means not panicking when markets fall and not taking profit when my shares are doing well. To generate passive income, I need to stay invested.
If I really must take action then the best thing to do is reinvest what I receive. Owning more shares means more passive income. And when the time comes to start spending it, I should have a far larger pot of cash to dive into.