There are plenty of passive income ideas out there. Some are rather fanciful, though. And others require constant effort to some degree. For me, the way to generate passive income is through investing in shares on the UK stock market.
And that involves very little effort. I’d start by transferring £200 per month into a Stocks and Shares ISA. Then every time I’d accumulated £1,000, I’d invest it in a stock purchase.
That’s it, then, with no further effort needed on that investment. Just leave it there for decades, until I want to retire.
Am I making it sound too easy? Well, maybe. After all, when we have the cash for an investment, we still have to figure out what to actually buy.
And there’s a bewildering number of individual shares out there that we could go for. There are literally thousands of stocks and shares that can be bought in an ISA.
Passive income picks
But I have a quick and easy way of narrowing it down to a small handful of possibilities. I’d go for just two categories of shares — UK investment trusts and UK dividend shares.
My first instalments would go into investment trusts. These are pooled investments, and the money is spread across a range of investments with a stated strategy.
Investment trusts
That means I get some instant diversification and don’t have to worry about individual stocks going bad. But which investment trusts?
I’d start with the list of Dividend Heroes put together by the Association of Investment Companies (AIC). That lists all those that have raised their dividends for at least 20 years in a row — and some have achieved that for more than 50 years. To me, that suggests they carry less risk.
The AIC helpfully lists their strategies. So I could start with a trust that seeks income from UK shares, like City of London. Then maybe I’d go for a global one next, like Bankers or Alliance Trust. And so on.
Dividend stocks
Once I have a few investment trusts tucked away, I’d start looking for individual dividend shares. Individual companies are riskier, but I’d try to offset that risk by selecting ones from different sectors.
Again, I’d use a useful resource for narrowing down the choice. AJ Bell publishes its Dividend Dashboard every quarter, which examines the biggest forecast yields in the FTSE 100.
Some are very high, but they’re regularly cut. So picking from those with no cuts in the past decade, I might go for British American Tobacco. Then perhaps consumer goods manufacturer Unilever. After that, maybe pharmaceuticals giant AstraZeneca. Or National Grid, which is a long-term dividend provider.
Balancing risks
There are always individual risks, and none of these dividends is at all guaranteed. We’ve even seen spells when UK shares have performed poorly.
But if I’m investing for decades, the long-term evidence convinces me that UK shares should win out. And with my diversified approach to seeking passive income, I only need to make one investing decision every five months. And then do no more work.
