Know of an easier way to earn passive income than simply owning a (small) stake in a company and I’m all ears. I can’t find one.
So, what would I buy today if starting from nothing?
My answer may surprise you.
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Don’t be greedy
One of the first things that became apparent to me when I first started investing for income was that hunting for stocks offering only the highest dividend yields was courting with disaster.
As I quickly learned, the problem with this approach is that these businesses were often in a tricky spot. Perhaps profits had tumbled and/or they had unmanageable levels of debt. These things pushed investors to sell up, pushing the share price down and the yield up.
You can probably guess how this story (usually) ended.
If things didn’t improve, those firms were forced to reduce the dividends. In some cases, they were wiped completely.
For this reason, I quickly learned to prioritise companies that had a great record of returning rising amounts of cash to shareholders every (or nearly every) year over the actual amount they returned.
Top stocks
Fortunately, it’s not hard to come across such high-quality stocks. Many can be found in the Premier League of the UK stock market – the FTSE 100.
There’s defence giant BAE Systems and Marmite-maker Unilever; there’s international distributor Bunzl and safety tech firm Halma.
Would there be uproar if I clicked my fingers and their services and products didn’t exist? I think so!
The fact that demand for what they do has stayed relatively constant has allowed earnings — and dividends — to keep going up for years.
These are the sort of stocks I’d buy today if passive income were my primary goal.
Buyer beware
Of course, all investing involves risk. If I’m not comfortable with the idea that the value of my shares will rise and fall regardless of any dividends they pay out, the stock market probably isn’t for me.
The thing is, study after study has shown that shares outperform every asset class over the long term.
That last bit is key. If I demand to become rich in a year, I could be in for a nasty shock; if I want to build a nest egg over a decade or two, history suggests the odds are very much in my favour.
Besides, there are ways of making the journey a little less bumpy.
Readers will note that none of the stocks I’ve mentioned operate in the same part of the market. This was intentional. Spreading my money around should mean that the income I receive probably won’t fluctuate as wildly as if I were heavily exposed to just one or two industries.
Small steps
There’s one last experience I must share.
Reaping the rewards from any new endeavour takes time. Investing for passive income is no different. Initially, the payments I received were laughably small.
But little did I appreciate how much these would grow if I continued to put more money into the market and reinvest what I received rather than spend it.
Doing the above has allowed me to benefit from the wonder that is compound interest. And it’s this that could ultimately allow me to retire earlier than most and live off those juicy dividends.
