Many people have fantastical dreams of earning passive income and retiring early into a life of luxury. And understandably so. No more boss to answer to, no more annoying emails… there’s a reason it’s called a dream!
But for many, it seldom goes any further than that. The reality is that few people ever achieve a steady and reliable stream of passive income. Yet social media would have us believe it’s within everyone’s grasp.
So why do so few people gain this type of financial independence at an early age?
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While there’s no scientific answer, anecdotal evidence suggests most people have unrealistic expectations and lack patience. They expect quick results and substantial returns within a short period, underestimating the time, effort and discipline needed to build a sustainable income. When immediate returns don’t materialise, they become discouraged and abandon their goals.
The truth is, passive income isn’t some magic trick or get-rich-quick scheme. There are no shortcuts. Like everything in life, the reward is only equal to the effort put in. Fortunately, with a bit of planning, there are ways to minimise the potential for failure.
Five steps to success
- Formulate a clear plan: this is the foundation and is critical to the success of all other steps
- Put in the work: hours of research should be dedicated to each and every investment decision
- Be realistic: overestimating potential returns or underestimating upfront investments can lead to frustration
- Be consistent: stick to the regular monthly contributions by prioritising them over unnecessary expenses
- Trust the process: markets are volatile, prompting investors to panic sell. It’s critical to control emotions and have faith in the plan
Investing for passive income
The steps mentioned above can be applied to the goal of achieving passive income by investing in stocks. Research, planning and regular contributions are key — not to mention a lot of patience.
When picking stocks, there are several key metrics to check before making a decision. For example, consider 3i Group (LSE: III), the top-performing stock on the FTSE 100 over the past five years.
The private equity and venture capital firm invests in various companies, most notably the European discount store chain Action. Its historical performance is good but it’s not enough to go on alone. Investors can assess its potential for stable income by checking its dividend history, financial results and valuation.
At first glance, its dividend yield seems low, at only 1.7%. However, payments are consistent and have been growing at a rate of 32% a year since 2010. In the past, the yield’s often been 3-4%.
Since 2019, earnings have increased considerably, from £214m to £3.84bn in 2023. However in 2023, earnings missed analysts’ expectations by 5.97%. This was attributed to increased costs and a challenging macroeconomic environment. These problems may continue to pose risks, along with supply chain issues and exchange rate fluctuations.
Upcoming earnings are expected to rise 20% for the 2024 full year, due by the end of March. And despite the price rising 58% in the past year, it’s only 8.8 times earnings — suggesting room for more growth.
These factors show how 3i could be a stock worth considering as part of a portfolio aimed at passive income.
