£500 to invest this payday? Here are 2 great passive income ideas to consider

It has never been easier to generate passive income from the stock market. Here are two ideas for those with £500 to invest to consider today.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today (31 January) is the last Friday of the month. So, for a lot of people across the UK, it’s likely to be payday. Have £500 to invest this payday and looking to create some passive income? Here are two investment ideas to consider.

Easy cash flow

One of these easiest ways to generate extra cash flow these days is to buy into an income fund. These typically invest in a range of dividend stocks and pass on the dividends collected to investors.

A good example of this type of product (and one that could be worth researching) is the Schroder UK-Listed Equity Income Maximiser fund, which is available on Hargreaves Lansdown and other similar platforms. This is invested in nearly 200 companies and it pays out quite a bit of cash to investors.

Indeed, this fund aims to reward investors with a 7% yield. Now, this isn’t guaranteed (dividends never are). Currently however, Hargreaves Lansdown says the product’s historic yield is 6.87%. That’s attractive relative to what’s on offer from savings accounts today.

Since its launch in December 2020, this fund has performed pretty well overall. Including both gains and income, it has returned nearly 50%.

A risk going forward, however, is that it could underperform the broader stock market. Often, high-yield dividend stocks don’t perform as well as investors are hoping they will.

It’s worth noting that a lot of income funds have both an ‘accumulation’ and an ‘income’ version. The difference here is that the former will reinvest all dividends while the latter will pay them out to investors. So, if one is looking for cash flow now, the income version is the one to go with.

High yields from dividend shares

Another easy way to generate some passive income is to build a portfolio of individual dividend shares. This is riskier than going with a fund because the high level of diversification provided by funds reduces risk significantly. But there can be some big rewards on offer for those willing to pick individual stocks.

Take shares in savings and investment company M&G (LSE: MNG), for example. Currently, they are expected to pay out dividends of 20.7p per share for the 2025 financial year. Given that the share price today is 209p, that translates to a yield of a whopping 9.9%.

Now, as I said earlier, dividends are never guaranteed. And the forecast above is exactly that – a forecast (meaning that it may not be accurate).

And dividend sustainability is not the only risk to consider here. Another is share price volatility. Like a lot of financial stocks, M&G tends to swing around wildly whenever there is some uncertainty in the world’s financial markets. So, one needs to be comfortable with the possibility of capital losses.

I think the stock is worth considering for income, however. I believe the company has a relatively attractive future (people need to save for retirement) and its valuation seems very reasonable today.

Created with Highcharts 11.4.3M&g Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

It’s worth pointing out that many brokers still charge commissions to buy individual shares. And these can eat into one’s returns. If an investor was looking to invest £500 in an individual stock such as M&G, I would suggest going through a broker that offers zero or very low commissions in order to maximise returns.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown Plc and M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Dividend Shares

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Dividend Shares

£10,000 invested in BP shares 5 years ago is now worth…

BP shares haven’t performed terribly over the last five years. However, investors could have done much better in other areas…

Read more »

Investing Articles

1 FTSE 250 stock I’ve sold in February

Stephen Wright's been selling a FTSE 250 passive income stock this month. What changed his mind about his investment and…

Read more »

Investing Articles

I’ve lost my faith in National Grid shares!

Harvey Jones is surprised to discover he's lost faith in National Grid shares to deliver reliable dividend income and growth…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

£20k to invest? 2 FTSE 250 dividend stocks to consider for a potential £1,220 passive income!

I think these two very different high-yield FTSE 250 stocks could be great sources of dividend income over the long…

Read more »

Investing Articles

Are Legal & General shares gaslighting me?

Harvey Jones is beginning to doubt his own take on reality. He thinks Legal & General shares are a brilliant…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Up just 8% in 5 years, what’s going on with the National Grid share price?

Over five years, the National Grid share price has grown -- but far less than the benchmark index of which…

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Dividend Shares

3 reliable FTSE 250 shares to consider buying for rising passive income

Paul Summers identifies three mid-cap stocks that all boast enviable records of throwing more cash back to their shareholders each…

Read more »

estate agent welcoming a couple to house viewing
Dividend Shares

Taylor Wimpey shares fall again as profit tanks 32%! But is now the time to consider buying?

Taylor Wimpey shares can't stop falling and today's full-year results haven't helped matters. However, our writer thinks the long-term outlook…

Read more »