I love the idea of generating passive income. Let’s be honest, who doesn’t like the sound of earning extra cash while they sleep?
Now, that may sound too good to be true. But it’s not. And there are plenty of easy ways to earn some extra cash on the side. Inflation has run rampant in recent years and I’m not keen on the thought of it eating away at the cash in my pocket. By generating passive income, I can try and hedge myself and protect the value of my money, as opposed to it sitting stagnant in the bank.
If I had a spare £5k, here are the steps I’d take to create streams of passive income that I could rely on in the years to come.
Selecting the best
The first thing I’d do would be to open a Stocks and Shares ISA. Every UK investor has a £20k annual contribution limit to take advantage of. With no taxes due on capital gains or dividends, using an ISA is a smart way for me to maximise my potential gains.
Please note that tax treatment depends on the individual circumstances 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.
Next up, I’d have to research where to put my money. For me, the FTSE 100 is the best place to start. The index homes some of the highest-performing companies in the UK. What’s more, its average dividend yield of 4% is higher than most major benchmarks across the globe.
Within the Footsie, I’d have to do my homework. By doing so, I’d minimise the risk of making poor investment decisions. For example, I’d look at a company’s financial health. A strong balance sheet would signify that a firm would be able to potentially weather any storm. Furthermore, I’d also look at debt levels, given higher interest rates could make it more expensive to pay off.
Finally, I’d also look out for Dividend Aristocrats. These companies not only consistently pay a dividend, but they also have a strong track record of increasing the size of their payout. While past performance is by no means an indication of future returns, it would provide me with a level of comfort. The FTSE 100 consists of numerous Dividend Aristocrats. This includes companies such as British American Tobacco, which I hold.
Extra steps
So, by targeting the right shares, I’d enhance my potential for some handsome returns. But there are a few other methods I could use.
A key one is playing the long game. What I mean by this is holding the shares I buy for a period of five years minimum. The stock market can be volatile. But by looking at the bigger picture, I’m able to ignore short-term peaks and troughs in favour of long-term gains.
Alongside employing this mindset, I’d also reinvest my dividends. Over time, I’d benefit from compounding, meaning I’d earn interest on my returns as well as my initial investment. This would lead to greater passive income payouts further down the line.
Of course, dividends and stock market returns are never guaranteed. Nevertheless, by adopting these methods, I’m confident I could create streams of passive income that would serve me for later life.
The post £5k of savings? I’d turn that into a lifetime of passive income with these simple steps appeared first on The Motley Fool UK.
Our analysis has uncovered an incredible value play!
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
1 dirt cheap artificial intelligence (AI) stock to buy in 2024
Here’s what I think will happen to the Rolls-Royce share price in 2024
I’d buy these UK shares to start earning a second income
Legal & General shares could return 20% this year
2 FTSE 250 stocks starting the year at 52-week highs
Charlie Keough has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.
