Passive income is money one gets without having to earn it through work. For example, if one rents out a field to a local farmer or earns interest on a savings account, it’s a form of passive income. Finding passive income streams which are simple to understand and don’t require much time or money can be a challenge. But by putting aside just £10 a week, I think it’s possible to start building solid passive income streams.
Here are two passive income streams I’d consider.
High-yield shares as passive income streams
£10 a week might not sound like a lot but it’s just over £500 annually. That would be enough to get started investing in shares. I’d drip feed the weekly payment in until I felt I had enough to make my first investment.
I’d consider looking for shares with a high yield. That means they payout a relatively high percentage of their cost price each year to shareholders, as dividends. Right now, the FTSE 100 index of leading shares yields around 3%. So £10 a week should throw off about £15 a year in dividends. But some shares have a much higher yield. For example, Imperial Brands yields over 9%. So investing at the current price, I’d expect £520 to generate passive income of around £46 per year in future.
That isn’t guaranteed, though. Dividends can be cut and indeed Imperial cut its dividend last year. Its main business is cigarettes. Smoking is declining in many markets. On the positive side, if dividends do continue, I wouldn’t just get passive income next year. It should continue for as long as I held the shares, based on the dividend payouts. So putting in £10 a week now could still be earning me passive income far into the future.
Alternatively, I could pick shares that offered some income but also growth potential. In theory, all shares have growth potential – Unilever could continue to grow profits as more consumers buy branded products. Even Imperial could grow, for example by raising prices or expanding into new markets.
But some shares already paying out income have much clearer pathways to growth. If I was willing to accept a lower yield I might also get some future growth as well. For example, B&M European Value Retail had paid 24.3p in dividends – including special dividends – this year and still hasn’t declared its final dividend. That means the yield is at least 4.5% but will probably be higher. Even if 4.5% is the final yield, on £10 a week that would amount to almost £24 of passive income a year. That depends on the dividends being maintained, though, and special dividends in particular tend to vary each year.
But B&M also continues to grow its business fast. It’s one of my favourite ideas for passive income streams. But it could also produce some share price gains.
B&M has proven its ability to thrive in a tough retail landscape. But with retailing facing challenges from quiet high streets to online shopping, B&M’s recent success might not continue. Its model could be copied by competitors, as happened with many dollar stores in the US. So I’d diversify my £10 weekly investment across multiple shares to help reduce my exposure to any one company’s fortunes.
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christopherruane owns shares of Imperial Brands. The Motley Fool UK has recommended B&M European Value and Imperial Brands. 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