I could use these simple passive income ideas for £20 a week
Setting up passive income streams is a great way to get some extra cash without working hard for it. Some of my favorite passive income ideas are dividend stocks. By investing in it, I can receive part of the profits of large successful companies, Apple for Tesco.
Even better, I don’t need a lot of money to start getting this income. Here are some ideas I would consider using for a £20 weekly budget.
Dividend Stocks as Passive Income Ideas
First, I’ll cover some practical aspects. £20 a week is just over £1,000 a year. The amount of passive income I generate will depend on the dividend yields of the stocks I buy. It is the percentage of the share price that a company pays out each year in the form of dividends. Imagine that I invest in stocks with an average return of 5%, which is higher than the FTSE100 average return of the index, but certainly possible. Based on this, I would expect to earn an annual passive income of £52 from a year of investing £20 a week.
It may not seem like much, but that’s just the start of things. If I continue, the second year I could earn dividends on the stocks I buy in those 12 months. But I will still earn the dividends paid by the stocks I bought the year before. This way, after a decade of investing £20 a week in stocks earning 5%, I hope to receive a weekly passive income of £10. On top of that, I would still own the stocks I invested the money in. I could sell them at any time, but not necessarily for a profit.
Dividends are never guaranteed. A company may have a bad year in its business and decide to reduce its dividend, for example. Again, things might improve over time. I may get lucky and find that a company I bought pays me higher dividends every year. As I don’t know what will happen, I would diversify my holdings in different companies and fields of activity. This way, I would reduce my risk in case some of my passive income ideas turn out worse than I hoped.
Tobacco companies can be lucrative passive income ideas. Manufacturing costs are low. Tobacco is a mature industry with limited opportunities to invest in growth, so capital expenditure requirements also tend to be low. Customers are willing to pay a high price for tobacco products, so producers have pricing power. Taken together, these factors explain the enormous current cash flows in the tobacco sector.
These cash flows can fund large dividends. This is the case for both Lucky Strikes owner British American Tobacco and John special player maker Imperial Marks. I’m using both of these passive income ideas in my portfolio right now. They are currently yielding 6.9% and 7.9% respectively.
The long-term decline in demand for cigarettes is a risk, although price increases may help offset the impact on earnings as volumes decline.
Another industry that generates significant cash flow is telecommunications. Customers are often locked into long contracts. The desirability of services such as 5G allows providers to charge high prices.
Long-term customers who pay high prices are a recipe for profit. But to deliver services, companies must invest in expensive networks. This type of capital expenditure can undermine profitability. This is one of the reasons why I am more attracted to the giants than the minnows when it comes to choosing telecommunications stocks for my portfolio. Titan of Industry Vodafone yields a nice 6%. This is one of the passive income ideas I would consider for my portfolio.
Stocks in utilities like water and electric companies are popular passive income ideas. The recurring nature of essential service revenues means that utilities tend to be reliable dividend payers, even if, as I said, dividends are never guaranteed.
A utility that I would consider holding in my portfolio is an energy grid operator national grid. Its electricity distribution network allows it to support recurring profit flows. This can fund dividends to shareholders. Right now, I could get a 4.6% return if I bought it for my portfolio. Electricity usage patterns could change, so the company may need to spend money to upgrade its networks. This could hurt profits. But no matter what, I think electricity will still be in daily use and will require a distribution network for the foreseeable future. That’s why National Grid is the kind of dividend stock I’d happily buy today for my portfolio and hold for a decade or more.
Putting passive income ideas into action
£20 per week add up. But I still have to be realistic about the scale of my passive income ambition. Imagine that in my first year of investing, I split my money equally between Imperial Brands, Vodafone and National Grid. I would exclude British American Tobacco from this example to avoid my portfolio being too focused on one industry.
These three stocks have an average yield of around 6.2%. So my first year’s savings of £1,040 would hopefully generate annual dividends of around £64. In fact, over time they could increase if companies increased their dividends, which two of them did last year. Again, they may also be cut at some point – Imperial Brands and Vodafone have both cut their dividends in recent years.
A passive income of £64 a year is clearly not going to transform my professional life. But it could help fund a fancy meal or be a useful addition to the holiday chat. I think the true power of dividend stocks as passive income ideas becomes clearer over the long term. Putting £20 a week into stocks year after year would hopefully increase my passive income streams considerably. From £20 this week I could start using simple passive income ideas that could bring me money for many years.
Christopher Ruane owns shares in British American Tobacco and Imperial Brands. The Motley Fool UK recommended Apple, British American Tobacco, Imperial Brands, Tesco and Vodafone. 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.