Right now, everyone is looking for ways to generate some passive income. This makes sense. Who wouldn’t want a little more income in today’s inflationary environment?
Here, I’m going to highlight three simple investing-based passive income ideas for 2023. All three strategies are super easy to set up and can potentially be started with just a few hundred pounds.
Equity income funds
One really easy way to generate some extra cash flow is to invest in equity income funds. These aim to provide investors with both long-term capital gains and income – a winning combination when it comes to building wealth.
On investment platforms such as Hargreaves Lansdown and AJ Bell, there are many equity income funds to choose from. Most tend to offer yields of around 3%-4%. However, there are some products that offer much higher yields.
One fund I’m considering for my portfolio right now is the FTF Martin Currie UK Rising Dividends (the income version). This fund — which aims to provide investors with rising income over time — doesn’t have the highest yield (it’s just under 3% currently). But it has produced very solid total returns (capital gains plus income) over the long term. Past performance is not an indicator of future performance though.
It’s worth pointing out that on Hargreaves Lansdown, one can start investing in funds with just £100.
Another simple way to generate passive income is to invest in income-focused investment trusts. These products are similar to equity income funds, however, they are listed on the stock market and trade like shares do. So, one typically needs to pay trading commissions to buy and sell them.
One trust I’m considering for my portfolio is the Murray Income Trust. This has a great track record when it comes to rewarding investors with income. Indeed, it’s classified as a ‘dividend hero’ meaning it has increased its income payout every year for over 20 years. The yield is currently a little over 4%.
Another one I’m looking at is Merchants Trust. It’s also a dividend hero. It has a yield of nearly 5% at present.
Finally, we have dividend stocks. These are stocks that pay out a proportion of company earnings to shareholders, in cash, on a regular basis.
Investing in dividend stocks is a little riskier than investing in funds and trusts. That’s because stock prices tend to be more volatile than fund and trust prices.
However, on the flip side, there are higher rewards on offer. For example, on the London Stock Exchange, there are many dividend stocks that offer yields of 6% and higher at the moment.
One stock I’ve got my eye on right now is Legal & General Group. It currently sports a yield of around 7.5%, meaning a £1,000 investment could potentially generate income of around £75 per year for me.
Of course, with this strategy, it’s essential to manage risk. The best way to do this is to own a number of different stocks from different industries.
By taking a diversified approach, investors can lower their portfolio risk dramatically and put themselves in a good position to generate solid long-term returns.
Edward Sheldon has positions in Hargreaves Lansdown Plc. The Motley Fool UK has recommended Hargreaves Lansdown 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.
Motley Fool UK 2023