Even if we stick to the stock market to build up a passive income, there are still a number of different options open to us.
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Alan Oscroft
Alan is a freelance writer who began writing for The Motley Fool in the late 1990s. He has been a private investor for more 30 years, and has explored a number of strategies, settling on high-yielding blue-chip shares.
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There are many ideas out there for earning passive income, and I’ve been looking for some top tips.
I’m keeping it to ideas based on stocks and shares, so there are no ostrich farms or rubber plantations for me. Or Cash ISAs.
Here are my top five, from hunting down what experts are saying.
1. Dividend stocks
UK stocks paying high dividends are big favourites. And right now, I think they make more sense than ever.
It looks like the FTSE 100 could break its all-time record for dividend cash as early as 2024. Even 2023, based on current forecasts, looks set to be the third best year ever for FTSE 100 cash returns.
Some forecasts even suggest banks could soon be paying more dividend cash than in 2007, and that was before the big crash.
2. Investment trusts
Buying income-focused investment trusts (ITs) is another popular pick.
Yields might be a bit lower than some individual stocks, but they can be more consistent. Each IT has its own strategy, and some go for income from UK equities, for example.
With some dividend yields reaching around 5%, a number of ITs have managed to lift their dividends for more than 50 years in a row now.
3. Exchange-traded funds
An exchange-traded fund (ETF) is a collective investment. But unlike, say, mutual funds, we buy shares in them rather than directly handing over cash to manage. Like investment trusts, really.
Some of them track specific stock market indexes, so we might expect to get an income in line with, say, the FTSE 100.
Others seek global equity income, among a range of strategies. And similar yields to investment trusts are common.
4. Real estate
Didn’t I say I’m sticking to stock market investments? Well, I am, and this choice is a subset of my investment trust pick.
This time I’m thinking of real estate investment trusts (REITs). At times when property prices are down, like now, they can give us an entry into the market without needing the cash to buy a whole house. Or a shopping centre.
In fact, there are REITs covering all kinds of real estate, with most making their money from rents.
Please note that tax treatment depends on the individual circ*mstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
5. Growth stocks
Some stocks pay little or no dividends, but provide capital growth instead. Now, that’s not much good for investors who want the income today.
But for those of us looking to build up a passive income pot for some time in the future, they open up more options.
In fact, if we invest for future cash rather than cash today, total returns are all that matter. We can always move the cash to a passive income investment when the time comes.
Risks
The main risk with any dividend-based investment is that the dividends might not be paid. After all, some yields are high simply because the market expects failures.
One way to manage risk is to seek diversification, to reduce the pain of a single investment going bad. The other is to invest for the long term — I’d say at least 10 years.
