Wouldn’t it be lovely to wake up each day to find money magically appearing in my bank account? Generating a passive income is a common financial goal. Yet despite numerous methods available for achieving this, many consider it an elusive dream rather than a reality. But what if I said that making money while sleeping is not only easy, but also requires next to no effort and could cost as little as sacrificing a morning coffee?
Here in the UK, a coffee costs around £3. For those dedicated to their morning cup, that’s a monthly expense of around £90 or up to £1,095 per year. Simply cutting out this expenditure could already save a significant amount of money. But how can I use these savings to generate a passive income? That’s where the stock market comes into play, specifically dividends.
Making money while I sleep
For those completely new to this concept, dividends are a form of payment shareholders receive for simply being shareholders. That’s because when an investor buys shares, they’ve just purchased a small piece of business. And as an owner, that entitles them to a cut of the profits even though they aren’t helping run the company.
Not all stocks pay dividends. Typically, high growth or young enterprises prefer to retain their profits to reinvest in new projects. If these projects prove successful, the underlying business becomes more valuable and the share price increases, rewarding shareholders through capital gains instead.
With that in mind, it shouldn’t be too surprising that dividends are usually paid by mature companies. This also means they’re often established leaders in their industries, reducing some of the risk associated with an investment.
Take Imperial Brands or Persimmon as examples. Both of these industry leaders currently pay an impressive 9% dividend yield. That means my £1,095 coffee-sourced savings could be generating 9% interest each year or £98.55.
That may not seem like much. But compared to the measly 0.6% interest generated by an average savings account, it’s quite an improvement, even more so when considering the wealth-killing effects of inflation. What’s more, if this passive income is reinvested, and both stocks continue to deliver the same level of dividends, then after five years, that £98.55 turns into £589.79.
To put this into perspective, that’s roughly the same as 196 coffees. And after 10 years, it grows to just under 500 cups of coffee a year. Needless to say, that’s a lot of caffeine!
Generating passive income has its risks
As exciting as the concept of passively generated income may be, investing in the stock market, even in mature businesses, has risks. After all, dividends are only as good as their underlying companies. If profits start to fall, payments are likely to get cut or could potentially disappear altogether. And even if dividends are maintained, the same may not be true for the share price. Suppose the stock were to tumble? In that case, the gains from passive income could be cancelled out by the losses on my invested capital.
Despite these caveats, dividends remain my preferred method of generating money while sleeping. And the prospect of eventually being able to generate enough to get free coffee for life from the interest I earn makes it a risk worth taking, in my opinion.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.
This post was originally published on Motley Fool
