Passive income is money one receives without working for it. Simple passive income ideas include owning a lockup garage and renting it out, or renting an advertising hoarding on a field one owns.
But a lot of passive income ideas aren’t as straightforward – they involve spending time and often money to set up a business now, in the hope of a passive income stream in the future.
That doesn’t attract me for several reasons. First, if I have to spend a lot of time on the activity, it isn’t really passive. Secondly, why take the risk of starting a new business when I lack the expertise? Instead of setting up a new online clothing business, for example, I’d rather figure out which online clothing businesses are already successful and see whether I can invest in their success.
Instead, I put money aside regularly to buy shares. With those shares, I am building my own passive income stream.
Riding the online retail boom
A lot of listed companies sell clothes online, from Boohoo to Next. But the rag trade is a very competitive business and so those might not be good income picks for my portfolio. Boohoo hasn’t paid a dividend, while Next’s current dividend yield is under 1%. That could increase, as it was cut during the pandemic. But even that makes me dislike it as an income pick.
Some retailers maintained dividend payouts throughout the pandemic. As passive income ideas, that sort of historical reliability commends them to me. For example, Morrison’s has paid dividends throughout the pandemic and yields around 4% annually. That means that if I put £10,000 in today I’d expect around £400 of passive income each year in future. Plus, occasionally the company pays out special dividends. It announced this week, for example, that it would pay out a special dividend of 4p per share, deferred from the prior year.
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Morrison’s is well-known for its chain of supermarkets. But it is also a significant manufacturer, owning everything from a flower packer to fish wholesaler. That vertical integration gives it a competitive moat in British retail. Its online operations are more substantial than many people realise and online sales tripled over the past year.
However, the cost of picking and distributing can make online sales less profitable while pulling some shoppers away from physical stores. Also the UK retail market remains very competitive. To maintain its dividend in future, Morrison’s will need to stay competitive and make enough profits to fund the dividend.
My passive income ideas include Tesco
While looking at Morrison’s, I have also been thinking about arch rival Tesco. Tesco is the market leader in UK retail. It also offers a decent dividend yield, around 5%.
Having sold off its Asian business lately, the company can focus on its core European operations. They tend to be lower margin, however, so Tesco will need to work hard to keep profitability at its prior level.
Tesco also faces a lot of the challenges Morrison’s faces. These include consumers shifting online and the rise of discount retailers like B&M. However, Tesco’s vast estate, brand recognition, and long experience make it a formidable retailer. I wouldn’t pick it for my growth portfolio, but a 5% yield lands it a spot among my passive income ideas.
The post 2 ideas I’d add to my passive income list appeared first on The Motley Fool UK.
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christopherruane has no position in any of the shares mentioned. The Motley Fool UK owns shares of Next. The Motley Fool UK has recommended boohoo group, Morrisons, and Tesco. 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.
Motley Fool UK 2021