With life possibly returning closer to normal next week, it could mean household expenses start to creep up again. That encourages me more than ever to think about practical ways to boost my passive income, which is money earned without having to work for it. Investing in UK shares is among my favourite passive income ideas. Here’s how I’d do it by putting aside just £50 each week.
Shares as passive income ideas
I like using shares to generate passive income for several reasons.
First, they really are passive – once I’ve bought them, I just sit back and wait for any dividends to roll in. Secondly, I can tap into top class expertise. Instead of trying to set up my own online store, for example, I could simply buy shares in a leading retailer with proven scale and business expertise.
Not all companies pay dividends, though. With passive income as my objective, I would hunt for companies that look likely to pay out a generous dividend yield. Dividends are never guaranteed, so I would also seek to reduce my risk by diversifying across different companies and sectors. £50 a week adds up to £2,600 in a year – that’s certainly enough to diversify. I’d drip feed the money in and buy the shares once I had enough funds saved to reduce the impact of trading fees.
Here are three specific passive income ideas I am excited about right now.
High yield tobacco
Tobacco shares often pop up on lists of high yielding dividend shares. They tend to generate substantial cash flows, which helps to pay dividends. Many investors shun tobacco shares for ethical reasons. That also means that the yield on them tends to be above much of the market.
I hold several tobacco companies in my portfolio, but one of my main passive income ideas is British American Tobacco. The company owns iconic brands such as Lucky Strikes which give it pricing power. That helps mitigate the risk of declining cigarette volumes, as pricing increases can help offset the financial impact.
The company’s brand portfolio also enables it to maintain a global footprint. That helps keep revenues strong even if there are weaknesses in some markets.
Passive income ideas: M&G
Another FTSE 100 member which pays out a dividend well above the market average is financial services provider M&G.
The company benefits from having both institutional and personal clients. That business mix means it is not wholly reliant on a single area of demand. It has a well known brand and long reputation. I think that bodes well for its future attractiveness to customers, helping keep acquisition costs low. That is good for profits.
The current M&G share price equates to a yield of 8.2%, one of the highest yields of any FTSE 100 member. One risk is that a plethora of fintech startups will drive down profit margins of traditional investment managers such as M&G.
Another of the passive income ideas I would consider adding to my portfolio today is telecoms giant Vodafone. It offers a yield of 6.3%.
I like the company’s wide reach and proven experience. That should hold it in good stead even as new technologies are rolled out. But buying telecom spectrum and investing in new network technology involves huge capital expenditure, which risks eating into profits.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.