Passive income is money one receives without working for it each time. Writing a novel, producing a movie, or owning thousands of acres of farmland could all generate passive income. But these aren’t realistic passive income ideas for a lot of us.
Similarly, for a lot of people, setting up an online business or becoming a digital nomad aren’t realistic passive income ideas. I prefer passive income ideas that require very little of my time and are genuinely passive.
How I earn passive income
My favourite way to earn passive income is putting some money regularly into a Stocks and Shares ISA and using it to invest in dividend yielding companies. That really is passive. I can just sit back and wait for dividend income to start rolling in.
My approach to realistic passive income ideas extends to my choice of shares too. While emerging technologies could do well in the future, they could also flop. So for income, I prefer to focus on companies that operate in well-established markets.
With fairly predictable cash flows and proven business models, they are more likely to provide the sort of income stream I am looking for. An example is Diageo. Its portfolio of drinks brands offers some diversification. Meanwhile, its finely honed business model has seen it raise its dividend each year for over three decades. The yield of 2.3% isn’t great – but with the company’s strong cash generation and dividend history, I think it is fairly secure. Of course there are risks, such as a downturn in alcohol consumption by health-conscious consumers. But for now, Diageo is the sort of passive income pick I’d be happy to hold.
Realistic passive income ideas can be simple
Passive income ideas don’t need to be sophisticated or hard to copy. For example, buying shares in British American Tobacco is not exactly a novel idea. But it is still one of my favourite passive income ideas. The tobacco giant owns brands such as Lucky Strikes and Gauloises. That gives it a lot of free cash flow and helps support a dividend yield of over 7%. No dividend is ever guaranteed. But with over twenty years of dividend increases behind it, BAT is one of the realistic passive income ideas that clicks with me. In terms of risks, tobacco usage is going down in some markets, and the stocks does not align with the growing trend toward ethical investing.
The insurance business is straightforward and unexciting. But that can be good for its reliability as a source of passive income. Legal & General shares yield 6%, which would be a very agreeable passive income for me. They continued to pay throughout the pandemic. The company has also set out a policy to keep increasing dividends for the coming few years. That depends on performance ultimately, but I feel confident in L&G’s expertise.
Some of the most realistic passive income ideas can be some of the most ordinary and dull. That isn’t a bad thing in my opinion. Rather than rely on hare-brained or unproven schemes, getting regular passive income from stable, well-established companies strikes me as an easy step to more financial success.
christopherruane owns shares of British American Tobacco. The Motley Fool UK has recommended Diageo. 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.