2 passive income ideas I would use on £5 a day
Some passive income ideas are simpler than others. One of the reasons I like UK dividend stocks for passive income is their simplicity. By putting money into a stock, I can just sit back, do nothing and wait, hoping the passive income will start flowing.
British American Tobacco
One of my favorite passive income ideas that I use in my own portfolio is to own stocks of British American Tobacco (LSE: BATS). The company behind famous brands such as Lucky Strikes is a cash generating machine. Cigarettes are cheap to make but can be sold for a high price. This helps explain the £9.8bn of net cash the company generated from operating activities last year.
BATS has substantial net debt – around £40bn when last reported. So part of that cash generation is used for interest payments. Even after that, strong cash flow allows for generous dividends. Last year, the company paid out £4.7 billion to its shareholders in the form of dividends. With a compound annual growth rate of 7% over 10 years and annual increases over more than two decades, the BATS dividend is very attractive to me.
Additionally, the company’s stock price means that currently the yield is around 7.8%. This means that if I invest £1,000 in stocks today, that investment alone would hopefully earn me £78 in passive income next year.
But dividends are never guaranteed and there are risks to the BATS dividend. For example, increasing regulation could impose additional costs, eating away at profit margins. Lower cigarette purchase rates in key markets could lead to lower revenues.
Another of the passive income ideas that I use in my portfolio is ExxonMobil (NYSE: XOM). The US-based energy company is an oil and gas giant. Although there is a risk that changing energy demand will reduce revenues, I personally believe that oil and gas could remain profitable for decades. A growing world population and the lack of profitable substitutes in many cases are expected to keep oil demand high for a long time.
Exxon has energy expertise that could also allow it to benefit from an increase in alternative energy sources. This could increase revenues and profits, although in years to come I consider it insignificant compared to the main profit drivers of oil and gas. Last year, many companies, including Exxon, cut capital spending sharply. This could lead to lower oil availability several years down the line. This could help support prices.
Exxon yields approximately more than 5%. In addition to the risk of falling demand and falling oil prices, there is currency risk. Since stocks are paid for in US dollars, currency changes could affect the amount I earn in passive income from my position at Exxon.
Two Simple Passive Income Ideas
If I put in £5 a day, after a year I would have saved over £1800. I could split that between BATS and Exxon. At current yield this would give me a projected passive income stream of around £120 per year in the future. Both companies have a track record of growing dividends, so my passive income could grow in the years to come, although that’s not guaranteed.
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Christopher Ruane owns shares in British American Tobacco and ExxonMobil Corp. The Motley Fool UK recommended British American Tobacco. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.