There are many different ways in which to try and make a passive income. But not all are created equal. Some are more lucrative than others, while some are more passive. For me, the allure of a passive income stream is the fact that I don’t need to work for it. So I am looking for something that takes as little of my time as possible.
One of my favourite passive income ideas is investing in dividend shares. Here are three reasons I like this strategy.
1. Dividend shares are genuinely passive
A lot of supposedly passive income ideas actually involve doing some work. By contrast, I can invest in dividend shares then sit back and not lift a finger if I’m so inclined. If the companies I hold pay a dividend, I will typically get passive income from them. It’s as easy as that.
I do think, though, that it’s worth spending time to research which dividend shares might best meet my personal investment objectives. Different shares carry a variety of risks as well as opportunities, so I’d like to maximise my potential passive income without taking on more risk than I’m comfortable with.
2. Passive income is relatively predictable
Even ideas that do generate passive income often provide it sporadically. By contrast, many dividend shares pay out on a fairly smooth, regular basis. That can help me plan my passive income around my financial needs.
Dividends aren’t guaranteed, though. Even a company with a long track record of consistently timed dividend payouts can cut or cancel them at a moment’s notice. That’s one reason I seek to diversify my portfolio across different dividend shares. That way, I am not so exposed to the ups and downs of any one company’s dividends.
3. I get expertise for cheap
One thing which strikes me about passive income ideas is they often involve people trying to make money by doing something in which they have limited or no experience. One thing I like about dividend shares as a passive income idea is that I can benefit from the hard work of expert managers.
Let’s say I reckon a good source of earnings could be online retail, for example. One approach would be to set up my own shop, get to grips with the software, try to find customers and sort out deliveries. But instead I could try to develop a passive income stream in this area. I could invest in companies that already sell online expertly and pay a dividend, such as Sainsbury, Tesco, and Next. That way, I don’t have to reinvent the wheel and instead can hopefully share in the profits of well-established businesses with expert management. I just need to find the right dividend shares for my portfolio.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.
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