Creating a sustainable and growing passive income is an ambition I and lots of other investors share. The attraction is obvious: if I can create a portfolio that can provide me with an income year after year, then I have options. The option to retire from full-time work, to retire early or to travel the world. If it was easy though, everyone would do it.
Actually, it requires a long-term view, a strategy and goal, grit and determination, and consistency in decision-making. Without these ingredients, I think it’s far harder to make a passive income from investing.
The ingredients needed to make a passive income
The current stock market recovery is, I think, a golden opportunity to create a passive income-generating machine. What do I mean by that? I simply mean a system that optimises my investments, like a machine can optimise lifting heavy objects, for example.
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To make the system work, I need to know what I want it to do. This is why having a goal and a strategy is so important. I also need to give it time to start working. In the case of investing this will be giving compounding the time to add significant value over time.
The grit and determination part refers to my need as an investor to stick through periods of underperformance, which is an inevitability. No one can invest in the best-performing stocks all the time. And no one can always have bought them at valuations that mean they can make a reasonable upside. That’s why sticking to a plan, and making only reasonable and well-thought-through tweaks is, in my view, smart.
This brings me on to consistency of decision-making. If I jump about all over the place, chasing the latest stock being tipped on Facebook, I think I’ll reduce my chances of success.
So with that in mind, there are some sectors where I think earnings tend to be reliable and therefore can pay growing dividends through most economic conditions.
Sectors that I’m looking at for dividends
These are the sectors I’m interested in to create a passive income. I’ll start with the riskiest first: housebuilders. The shares are quite cyclical and tied to confidence in the economy and the housing market. Given the government support for both though, I expect housebuilders to do well for a long time. Yields in the good times tend to be on the higher side, which is good from a passive income point of view.
One of the best sectors for reliable dividends is utilities. These regulated companies have great earnings visibility and can forecast what they’ll be earning into the future with reasonable confidence. They are a good place to find shares that combine value and income.
Lastly, I’d look at fast-moving consumer good companies like Reckitt Benckiser and Unilever. These companies are usually more expensive to buy because of their solid earnings, international markets, strong brands and high product turnover. However, they have decent margins and should compound over time giving me passive income and few headaches.
