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.
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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.
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.
