There are thousands of passive income ideas. But my favourite involves a Stocks and Shares ISA. In particular, I’d buy dividend shares for reliable and regular income.
There are three main reasons for doing so. First, it’s possible to start with a modest sum. Second, once I’ve bought my chosen shares it doesn’t require much additional time from me.
And finally, in addition to receiving dividends, the value of my shares can rise over time.
How much passive income?
If I invested just £20 a week, how much passive income might I expect? That depends on the dividend yield of the shares.
On average, FTSE 100 shares currently offer around 4% a year. That equates to around £40 a year in dividends.
It might not sound like much now, but over time I could raise my weekly investment. One more thing I could do is try to find higher-yielding shares.
Some shares offer up to 18% a year. That said, this sounds far too high to me to be sustainable. There’s always a chance a company could cut or suspend its dividends.
That’s why I’d prefer to own shares that yield around 5% to 10%.
Not just yields
But there’s more to dividend shares than just their yield. I’d say it’s equally important for me to own high-quality businesses.
What makes a good company can often be subjective. That said, I believe there are several characteristics that make a quality share stand out from the crowd.
Renowned investor Warren Buffett often talks about how businesses that have a moat are desirable. By this he means those that have a sustainable competitive advantage.
This can be in the form of a strong brand, or a patent. For instance, it could be said that Coca-Cola is a business that’s difficult to replicate. Companies can make rival soft drinks, but its well-established brand is a leader worldwide. And it would be a significant brand to beat.
Factors to consider
When looking for the most reliable passive income, I’d focus on shares that offer stable cashflows. I also like to see double-digit profit margins, stable or growing earnings, and a solid balance sheet.
Another factor that I’d consider is their dividend history. Some companies have been paying dividends to shareholders for decades. These stocks often have well-entrenched dividend policies that have remained consistent over the years.
Lastly, one other point I’d make is about diversification. To reduce my risk and prevent putting all my eggs in one basket, I prefer to buy a variety of shares. By this, I mean that I want shares that operate in different sectors to one another.
Right now, some shares that meet my criteria include Taylor Wimpey, Rio Tinto, Phoenix Group, Vodafone, and British American Tobacco.
On average, this selection offers an 8% yield and has a 19-year dividend history. In addition, the companies are profitable, established and difficult to replicate.
If I had a spare £20 a week to devote to a passive income plan, I’d buy all five shares today.
Harshil Patel has positions in British American Tobacco. The Motley Fool UK has recommended British American Tobacco and Vodafone. 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 2022