Sometimes it takes money to make money. Passive income that takes a lot of time doesn’t seem passive to me – but to be honest the alternative is often putting some sort of capital to work. The good news is that I think it’s possible to activate some passive income ideas starting with just £50 a week. Putting a small amount of capital to work each week can be very income-generative.
Here’s how.
Saving a little regularly is habit forming
Putting aside £50 a week on a regular basis is a way of getting into the saving habit.
£50 a week would be a couple of hundred pounds within a month. After three months, the pot would already be £650. That is a decent amount, in my view, and I’d be happy to start buying ‘passive income’-generating shares within a Stocks and Shares ISA.
If I wasn’t charged dealing fees, I’d start buying almost immediately. But if fees were levied on each transaction, I’d wait a little while to put more money to work at once. That would give me time to look at the market and decide what sort of shares to buy.
Passive income ideas in the stock market
Not all shares are a good source of income in the short term. Shares that are focused on growth such as The Hut Group or rebuilding their business like Saga often don’t plan to pay out dividends any time soon.
For passive income ideas, I would instead look for companies that generate substantial amounts of free cash with which to pay dividends. In many cases, they might not be fast-growing businesses. That is why they are able to pay out the money as dividends instead of investing it in their own future growth.
For example, one of my favourite passive income ideas currently is Imperial Brands. The tobacco giant is able to throw off a lot of cash from its portfolio of cigarette brands. Consumption in many markets is set to decline, which could affect this. But pricing power will hopefully allow the company to mitigate some of that impact.
Tobacco stocks seem to be fairly out of fashion. With its share price languishing, Imperial currently yields 9.8%. So putting just £50 into the stock ought to generate me a future annual passive income stream of around £4.90 every year. The power of saving every week suddenly becomes clear – every week of putting £50 away adds another possible £4.90 of future annual passive income.
Diversifying spreads risk
But what if Imperial doesn’t successfully navigate the challenges in the tobacco market?
A high yield is sometimes an indicator that analysts worry about a company’s future performance. I don’t know whether such fears will turn out to be justified. Spreading my passive income ideas across different sectors therefore helps me sleep more easily.
So, for example, as well as Imperial I hold Unilever. The food to detergents powerhouse yields 3.7%, which is a lot less than Imperial. But holding different blue-chip names is part of my strategy of spreading my risks across different passive income ideas.
Finding the right names and sticking to my strategy, I feel confident there are lots of rewarding passive income ideas even if I just put away £50 a week.