Some passive income plans seem complicated to me. They are not really passive and offer what I regard as a fairly low likelihood of generating meaningful income.
Compare that to a very old passive income plan that people have been using for centuries and is still widespread today: putting money into proven businesses that look likely to pay dividends in future.
That involves some effort when it comes to deciding what shares to own and then buying them. But over the long run it strikes me as passive.
When it comes to the likelihood of generating meaningful income, success depends in large part on how much is invested, as well as the dividend yield earned.
Start now and watch the income flow
Some shares never pay dividends while some pay erratically (and, no dividend is ever guaranteed to last). Some pay quarterly and others even pay monthly.
So if someone was to get going now, it is plausible that they could be earning passive income as early as the end of this summer.
A useful first step would be to set up a share-dealing account, Stocks and Shares ISA, or trading app.
After that, someone can put money in and decide what shares to buy. In any size of portfolio, diversifying across different shares is an important risk management strategy.
Income depends on investment size and yield
As I said above, dividends can move around. They can be cancelled or cut, but also increased. Nvidia this year increased its dividend by a phenomenal 2,400%. That is exceptional, though.
The yield matters when it comes to calculating likely income.
Passive income earned annually is basically the amount invested multiplied by the yield. So, for example, £10k earning a 3% yield (the current FTSE 100 average) ought to earn around £300 of passive income per year.
Here’s an income share I think’s worth considering
Although that is the FTSE 100 average, I think it is possible to target a higher yield while sticking to proven blue-chip businesses.
For example, British American Tobacco (LSE: BATS) is a FTSE 100 business that has grown its dividend per share annually for decades. It currently yields 5.3% and pays dividends quarterly. The next is due to be paid next month, and investors who own the share by the time it goes ex-dividend this Friday (10 July) should be in line to receive that.
Can the dividend keep growing?
Declining cigarette demand is a risk to revenues and profits for the Rothmans maker. Some investors may also be put off by the ethical concern of investing in a tobacco company.
But British American has been battling challenges for decades already in terms of cigarettes declining in popularity. Yet it remains hugely cash generative.
It aims to keep growing its payout per share annually. Recently, the company announced plans to cut costs that could help boost profitability.
With its strong portfolio of premium brands, extensive global reach, and proven cash generation capabilities, British American Tobacco offers a lot to like from a passive income perspective.
What income stock do we like better than British American Tobacco P.l.c. right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
