Many of us dream of generating a passive income. It’s become an increasingly popular target in the past decade or so due to the growth of internet investing. But it’s been possible for longer than that. Billionaire investor Warren Buffett recognised the miracle of generating a passive income when he was still a boy. Thanks to his father, an investment broker, he grasped the beauty of stock market investing. Rolls-Royce (LSE:RR) is one FTSE 100 stock that has been in the spotlight this year, and this trend is likely to continue. But is it a good stock to buy for passive income generation?
What is a passive income?
A passive income involves making money with little to no effort. Dividends make this a possibility via stock market investing because dividends are like interest that’s paid back to the shareholder.
It’s debatable how effortless stock market investing actually is. It can be a completely hands-off pursuit if employing an investment manager to take care of it. But that can be expensive. Index funds are another fairly effortless way for an individual to invest as they’re managed by a team of professional investors. This is becoming a popular investment option for busy people.
In any form of passive income generation, whether from author royalties, second property income, affiliate earning or other investments, it requires effort at the outset. Considering this, I think generating a passive income from stock market investing is the most appealing. It’s also very simple and can be extremely lucrative.
I need to research which stocks to buy. But once they’re bought, I can forget about them for years and let the passive income roll in. So what about Rolls-Royce? Unfortunately its dividend was cancelled this year and I imagine it will be a while before it’s reinstated. I think that makes it a less of an option for passive income generation and more of a potential buy-and-hold share for capital gains. But what are the prospects for its dividend?
Rolls-Royce shares: a good passive income buy?
Rolls-Royce has had a rough ride in 2020 so can it recover enough to see its share price surge in 2021? I’m not sure the tough times are over yet. And until we bring the pandemic under control, share price volatility is likely to continue.
The Rolls-Royce share price is down over 50% year-to-date, but may have further to fall. Flight bans and less international travel are the big issue. With the vaccine rollout signalling a return to freedom, the share price rebounded. Unfortunately, the appearance of new Covid-19 strains has thrown a spanner in the works.
More lockdowns will set companies back again. While the vaccine rollout should make a difference in time, we don’t know how long it will be until it takes effect. This setback could leave Rolls-Royce waiting a lot longer to return to its former glory.
The company wasn’t in great shape even before the pandemic struck and hasn’t been in profit for three of the past five years. However, it has successfully fundraised this year and I can’t see it going under unless things get much worse. I also think management will be keen to reinstate the dividend at the earliest opportunity. I imagine that won’t be before 2022, but I’d consider buying Rolls-Royce shares in 2021 to hold for 10 years+.
The post Passive income: should I buy Rolls-Royce shares in 2021? appeared first on The Motley Fool UK.
Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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 2020