There aren’t many things in life that offer true passive income. The stock market is arguably one exception. At the very least, I believe it has the potential to offer the best return relative to the effort involved.
Moreover, it doesn’t require having a whole lot of money to get started. In fact, I think an investor could build a portfolio of solid dividend-generating shares for just £100 a month.
Passive income winners
Assuming that money is within reach, the key is buying stocks that should, bar a ‘black swan’ event, continue paying dividends whatever the weather. Utility firms are a great example, hence my first pick is power provider National Grid. In charge of much of the UK’s energy-related infrastructure, it yields a chunky 5.1% right now.
Tritax Big Box shares look expensive. Nonetheless, the demand for the sort of warehouse space this real estate investment trust (REIT) owns should continue for many years to come. After all, the popularity of online shopping looks set to only increase. I’d therefore begin building a position with the intention of adding more in moments of general market malaise. The yield is 2.8%
Online trading firm IG Group remains one of my favourite listed companies. While the threat of increased regulation is never far away, the company’s bumper levels of free cash flow should ensure there’s no danger of the dividend being cut any time soon. It’s also a potential hedge if markets get volatile. IG yields 5.7% at the moment.
Boasting bursting lists of recognisable brands that shoppers tend to buy through habit, Britvic and Unilever shares — and their respective 2.7% and 3.7% yields — also get my votes. Both have near-perfect records of growing dividends over the years.
Here’s what I might get
Based on their forecast dividends at the time of writing (and assuming I invest equal amounts into each), the above five stocks generate an average yield of 4%. In other words, I’d get £4 in dividends for every £100 I invest. That’s an awful lot more than what I’d get from even the best Cash ISA on the block.
Are there ways of generating more passive income from UK stocks? Absolutely. However, one needs to question just how secure the payouts from cyclical companies involved in, say, banking, housebuilding and mining actually are.
Of course, there’s no guarantee that even the companies I’ve picked out will always be able to return cash to their owners. However, I have made sure to diversify across sectors. So even if one encounters a setback, the level of income should still be decent.
Patience required
Regardless of which stocks are selected, one thing worth highlighting is the time taken to generate a sizeable passive income stream. Initially, the money received will be negligible because the amount invested is small. That may not suit those with itchy trigger fingers and limited patience.
There are ways of speeding things up. Obviously, stashing more than £100 away every month is one option. Saving on fees by using a stockbroker’s regular investment scheme will also help.
If the income isn’t needed right now, an even better solution is to reinvest dividends. This boosts the accumulation of capital via compounding and could give me an even better passive income stream to draw on when I really want to put my feet up.
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Paul Summers owns shares in IG Group. The Motley Fool UK has recommended Britvic, Tritax Big Box REIT, and Unilever. 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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