Generating passive income is a common financial goal these days, especially for those who are over 50. At this age, some extra cash flow can make a huge difference – whether you’re looking to turbocharge your retirement fund, cover rising living costs, or simply build a comfortable cushion to work less and live more.
The good news is that building a passive income stream has never been easier. Here are three proven stock market-based strategies that can generate a ton of cash.
Dividend ETFs
Dividend-focused exchange-traded funds (ETFs) can be a great place to start when investing for passive income. These typically provide exposure to a range of companies paying dividends to investors (dividends are cash payments made to investors out of company profits).
One example of this kind of ETF is the iShares UK Dividend UCITS ETF (LSE: IUKD). This provides exposure to 50 different UK-listed businesses including the likes of BP, HSBC, and Lloyds.
The dividend yield is around 4.7% on a trailing basis. That equates to annual income of around £470 on a £10,000 investment.
Overall returns can be much higher though. Over the last five years, for example, the ETF has provided a total return (gains plus dividends) of around 80%.
Of course, if the UK stock market was to have a meltdown, returns would most likely be negative. I think it’s worth considering as a long-term investment though as over the long run stocks tend to rise.
Income-focused investment trusts
Another option is investment trusts. These are very similar to ETFs in that they typically provide access to many different stocks.
One income-focused investment trust that could be worth a look is the Murray Income Trust (LSE: MUT). Its goal is to provide a high and growing income stream along with capital growth.
It has a great track record on the income front. Believe it or not, it has increased its payout every year for over 50 years now. The yield’s currently a little over 4%. That’s higher than most UK savings accounts are paying right now, although this product is obviously higher risk than a savings account.
It’s worth noting that this trust recently appointed a new investment management team. This move was made in an effort to boost performance. While the new team has a great long-term track record, it has made a large bet on UK bank stocks. This is a risk to think about.
Individual dividend stocks
Finally, individual dividend shares can be another great source of passive income. These are riskier than ETFs and investment trusts but there’s potential for higher yields.
Take Aviva (LSE: AV.) as one worth researching further. The shares currently sport a dividend yield of around 6%. That kind of yield is hard to get from a fund. On a £10,000 investment, it equates to annual income of around £600.
There’s potential for share price gains too. Over the last year, the shares have climbed around 8%, although there have been plenty of fluctuations along the way.
Given the attractive yield, I believe Aviva shares are worth considering for passive income. The company has been performing well recently and its valuation looks very reasonable.
They are higher risk than a fund and in the event of a bout of stock market volatility they could underperform. Taking a three-to-five view however, I see the potential for attractive returns.
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Edward Sheldon does not hold any positions in the companies mentioned
