I’m always on the lookout for passive income ideas. They can be great ways to support a salary as passive income is earned even when I’m at work. And if I can grow my pot over time, I’ll be a lot more comfortable in retirement.
This brings me to the FIRE movement, or ‘Financial Independence, Retire Early’. It’s become popular over recent years to aim for early retirement. However, if I do want to retire early, financial independence is key. This is where passive income comes in.
Whether or not FIRE is the end goal, I still want to build my passive income stream. Here are two ideas I use, starting with only £300 a month.
Dividend stocks
For income to be truly passive, I think dividend stocks are an excellent option. I can buy shares in a company and become a part-business owner. This means I’m entitled to a share of the profits the business generates.
OK, I’d only be a minority shareholder, I have no say regarding how and where the company spends the profits it generates. This is up to the executive team and board of directors. They may invest all of the profits to grow the business and not pay a dividend.
But many do pay out some of their profits as dividends and that’s where I want to invest to achieve passive income.
I’d start by buying high-dividend-yielding stocks with my £300 in the first month. In each subsequent month I’d buy another stock that offers a high dividend yield so my portfolio becomes diversified over time.
I have to keep in mind that dividends aren’t guaranteed. They depend on the profits that the business generates, and the decisions of the management team.
Passive income with real estate
The next option I view as a great way to generate passive income is exposure to the property market. I don’t mean buying physical property and renting it out. This requires work to manage tenants and various other tasks, so isn’t truly passive.
But I can buy shares in a real estate investment trust (REIT) that manages a portfolio of real estate for me as a holder. REITs have to pay out at least 90% of taxable earnings to shareholders, so they’re another truly passive way to earn income.
Because REITs are exposed to the property market, there’s a good chance of some inflation protection for my portfolio too.
They’re not infallible, of course. Even though they have to pay out most of their earnings to shareholders, there’s still no guarantee I’ll receive a passive income stream. These companies are exposed to the property market after all, and require tenants to pay rent to generate earnings. If the property market struggles as it did last year, there’s a good chance my dividend would be cut.
However, I still think REITs are a good option to grow my passive income over time.
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Views expressed 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.
