As spring bursts forth and lockdown restrictions are set to ease, outside eating is set to return. Weekend brunch in the park or a café is ordinarily a staple of many people’s social diaries. But while brunch only lasts a mealtime, a passive income stream could last a lifetime.
Here’s how I’d start earning passive income for just the cost of weekend brunch.
The cost of brunch varies a lot. But let’s say that one spends £20 a week on brunch. Putting that away each week comes to a little over a thousand pounds a year.
I would use that money to start buying shares instead. It wouldn’t even mean I couldn’t have brunch in future – but whether I did or not, I’d still make a point of keeping this saving habit.
In the beginning I couldn’t afford to buy many shares so I’d seek to manage my risk by buying only a conservatively run, blue chip company. For example, a company like Tesco or National Grid would be on my consideration list here. Both yield between 5% and 6%, so I would expect £50–60 a year in passive income per year from them in future from my first year of saving if the dividends are maintained. That passive income could pay for a few brunches!
Over time, though, I would try to buy a wider selection of shares to diversify. Tesco faces risks from fast growing discount retailers, while National Grid could have profits constrained by regulatory changes. Investing in a broader basket of shares as my cash pile grew could help expose me to more names and so reduce my overall risk from any one investment.
Two passive income picks
I find good passive income ideas often emerge in industries that are mature and maybe even in their sunset years.
That is because the companies are able to throw off substantial amounts of cash thanks to their long-established customer base. However, there are limited opportunities to redeploy that cash in the business for growth. So it can be distributed to shareholders as dividends, although as with any shares there is no guarantee of future dividends no matter how good the dividend history.
An example is tobacco. The two leading FTSE 100 tobacco companies are British American Tobacco and Imperial Tobaccco. BAT yields 7.5%, while Imperial yields 9.5%. That is a very attractive yield to me. Instead of spending money buying cigarettes after brunch, I could be earning passive income from millions of customers doing that.
However, high yields can sometimes signal higher risk. For example, cigarette use is declining in many markets and the industry operates within very tight marketing constraints. Both companies are looking into next generation products like vaping, but for now I don’t think they will be as popular or profitable as cigarettes once were.
I hold both names and they are passive income favourites of my portfolio – but I am also realistic about the threats to the industry. That is why I am constantly looking for other passive income ideas I can use to build a profitable, diversified portfolio. That sounds as tasty as brunch!
The post How I’d start earning passive income for the cost of weekend brunch appeared first on The Motley Fool UK.
christopherruane owns shares of British American Tobacco and Imperial Brands. The Motley Fool UK has recommended Imperial Brands 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