With the cost of living rising, earning passive income has never been more important. And investors can do this by just following three simple steps.
The first is figuring out where to get the cash to invest, the second involves identifying stocks to buy. And the third is just repeating the first two.
Cash
There’s no way around the fact that buying dividend stocks takes cash. But that doesn’t mean investors need to have thousands in the bank before building a portfolio.
One way of making a start involves using part of a monthly salary. Putting aside part of a regular income from work to buy shares can be a great way of getting started.
Over time, this can be a powerful force. Investing £200 each month at 5% for 10 years can generate £1,424 per year – or £118 per month – in passive income.
The question is where to find stocks with a 5% yield. And I think the UK markets are a great place to look.
Dividend shares
Right now, UK shares trade at a significant discount to their US counterparts. That’s why there have been so many attempts to acquire FTSE 100 and FTSE 250 companies lately.
One good example is British American Tobacco (LSE:BATS). Shares in the tobacco business currently come with a dividend yield in excess of 9%.
A high yield can often be a sign of high risk and there’s clear danger with British Tobacco. The company’s largest division – combustibles – is probably in structural decline.
Pessimism can often be a source of opportunity, though. And British Tobacco has some interesting growth prospects with its Velo nicotine pouches.
Investing and reinvesting
I think British American Tobacco has some way to go before it stops being able to pay its dividend. It’s unlikely to grow, but I don’t expect it to be cut any time soon.
In the meantime, the company is going to distribute a lot of cash to its shareholders. And investors can reinvest that in other companies to generate even more income in future.
Unilever, for example, is a stock with a positive long-term outlook as demand for household cleaning products doesn’t appear to be in structural decline. It also pays a regular dividend.
Reinvesting dividends from British Tobacco into other stocks could be a good way of adding some diversification to a passive income stream. And this could also reduce the risk.
Simple… but not easy
There’s nothing intrinsically complicated about earning passive income. But identifying stocks to buy isn’t easy.
Companies need to be able to earn enough cash to pay shareholders for a long period of time. And they need to be trading at a low enough valuation to provide a decent yield.
Right now, though, UK shares look like a good place to be searching for stocks to buy. The discount to their US counterparts could be a great opportunity for investors.
The post 3 steps to earning £100 a month in passive income appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
£8 per year in extra income for life, for each £100 invested today? Here’s how!
4 stocks Fools love with a long history of increasing dividends
A 7.8% yield and growing! Is the Imperial Brands dividend a passive income bargain?
How much passive income could I earn by investing £100 a month in a Stocks and Shares ISA?
£12,000 in savings? Here’s how I’d aim to turn that into a £23,920 annual passive income!
Stephen Wright has positions in Unilever Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. and Unilever Plc. 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.
