The idea of earning money for doing very little sounds good to me. The trouble is, there are very few real forms of passive income out there, let alone ones that stand a good chance of delivering cash for an entire lifetime.
Investing in shares is arguably the exception. What’s more (and contrary to what some people think), it doesn’t require much money to get started.
Start small
As tricky as the current economic situation is, I think I could manage to put a small amount aside each week. For illustrative purposes, we’ll go with £5.
It could be a lot more, it could even be a bit less, but the actual amount isn’t as important as cultivating the habit of saving regularly.
After a year, I’d have £260 to put into the market. My next move would be to funnel all of this in a Stocks and Shares ISA. Doing so would mean that any passive income I eventually receive would be all mine and free from tax.
That could work out to be an awful lot of money over a lifetime.
The question then becomes what to buy?
Keep it simple (to begin with)
When I first started investing, I didn’t really know what I was doing. I certainly didn’t have the confidence to buy shares in individual companies.
On reflection, I think this was a good thing. Trusting all my hard-earned cash with just one business would have been a pretty risky move. A far better option, in my view, is to buy a fund.
A fund can be active (managed by a human) or passive (managed by a computer). I’d go with the latter initially since running costs are a lot lower.
An exchange-traded fund that tracks, say, the FTSE 100 feels ideal. This way, my money would be spread across a huge number of (familiar) companies, which would help to mitigate risk.
Receive, reinvest, repeat
Another reason for picking this kind of fund is that it pays passive income. Right now, we’re looking at a dividend yield of around 3.6%. In other words, I’d get 3.6% of my £260 back in dividends (minus any fees).
That might not sound much. However, it’s vital to understand that initially modest payouts will grow nicely if:
- I continue adding (and hopefully increasing) that weekly amount
- I reinvest that passive income back into buying more shares
Branching out
Once I felt more confident about what I was doing, I’d consider branching out into those single-company stocks. One reason for this is that some offer higher dividend yields than the FTSE 100 index as a whole.
However, no income stream can ever be guaranteed. So screening for businesses that have a strong record of paying out dividends to their owners would be prudent.
This might be because they have a very strong brand (consumer goods companies) and/or provide something that is always needed (utility firms or pharmaceuticals).
I’d also avoid businesses with big debt piles or unpredictable earnings, even if they are offering above-average yields.
In tough times, dividends are often the first thing to be cut.
Bottom line
Generating a passive income for life from the stock market is perfectly realistic and achievable, even for lazy souls like me.
The key, as ever, is just to get started.
This post was originally published on Motley Fool
