Passive income is money that you get without having to work for it. A common source of passive income is investing in stocks that pay dividends. Since dividends are never guaranteed, I like to use multiple passive income ideas at the same time.
Here are five such passive income ideas that I would be considering right now.
Popular brands
I would consider investing in Direct line. The financial services company is known for its iconic red phone. That helps him to acquire and retain customers.
Insurers can tap into attractive passive sources of income because they take in a large pool of money as premiums, but when things go well they have to pay out less of it as damage. This can lead to a cash-generative business model that helps support dividends.
Since Direct Line is currently yielding 12.5% including special dividends, it certainly looks attractive. In reality, the expected return is likely lower as the company compensated for unpaid dividends during the pandemic last year. Still, the pre-pandemic dividend of 29.3p is still a 10% return on Direct Line stock’s price today. Risks include the government’s recent moves to tighten rules for pricing renewals, which could hurt the bottom line of all insurers.
Another well-known brand on my list of passive income ideas is the supermarket chain Morrisons. I like the company’s vertically integrated supply chain and switch to selling online. With a return of 4% without special dividends, the payout is attractive to me. However, one of the risks is price competition in the UK food market.
Passive income ideas in finance
I would also consider a couple of financial firms as passive income ideas.
The City of London Investment Trust gives 4.8%. It pays dividends quarterly, which can be attractive to many passive income seekers. It has increased its dividend annually for the past few years even during the pandemic. The trust offers exposure to many stocks, including FTSE 100 faithful like Diageo, Rio Tinto, and Unilever. I love the fact that the trust does the stock picking so I can just sit back and enjoy all of the income it pays out. One risk is that the dividend is covered pretty thinly. So if the companies it holds cut their dividends, the trust can struggle to maintain its own payout level.
The story goes on
Another financial firm on my list of ideas for passive income is Jupiter Fund Management. As the name suggests, Jupiter manages funds. The name is already familiar to many private investors who buy into its funds – but I think Jupiter itself could be an attractive addition to my portfolio because of its passive source of income. The company is yielding 6.3%. One risk is the growing competition from providers of cheap funds, which could reduce profit margins.
High Yield Tobacco Company
The largest holding in the City of London Investment Trust is British-American tobacco. The tobacco giant that owns brands like Lucky Strike would also be one of my passive income ideas.
Tobacco companies like BAT tend to be very liquid. The 7.4% return is among the highest of any FTSE 100 company.
But BAT had more than £ 40 billion net debt on its balance sheet late last year. I see the risk that future cash generation could be diverted to paying off debt rather than distributing it as a dividend.
The 5 Passive Income Ideas I Would Consider first appeared on The Motley Fool UK.
Read more
Christopherruane owns shares of British American Tobacco and Unilever. The Motley Fool UK has recommended Diageo, Morrisons and Unilever. Views about the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make on our subscription services such as Share Advisor, Hidden Winners, and Pro. At The Motley Fool, we believe that taking a variety of insights into account makes us better investors.
Motley Fool Germany 2021
